What Is the Primary Risk Associated with Forward Contracts? ⎊ Path

What Is the Primary Risk Associated with Forward Contracts?

The primary risk is Counterparty Risk, which is the risk that the other party to the contract will default on their obligation. Since Forward Contracts are private agreements traded Over-The-Counter (OTC), there is no clearing house to guarantee the transaction.

If the counterparty goes bankrupt or refuses to honor the contract, the non-defaulting party may suffer a loss.

How Does the Clearing House Mitigate Counterparty Risk between Hedgers and Speculators?

How Does Novation by the Clearing House Reduce Counterparty Risk?

What Is the Role of the Clearing House in Managing Margin Calls during Volatility?

What Is the Role of a Clearing House in Mitigating Counterparty Risk in Derivatives?

What Is the Primary Risk Associated with a Forward Contract?

What Is the Main Function of a Centralized Clearing House in the Derivatives Market?

What Is the Function of a Central Clearing House?

How Does a Clearing House Mitigate Counterparty Risk in Futures Trading?

Glossar

Forward Contracts

Structure ⎊ Forward contracts, within cryptocurrency and derivatives markets, establish a customized agreement for the future exchange of an asset at a predetermined price and date, differing from standardized futures contracts through their bespoke nature.

Private Agreements

Arrangement ⎊ Private agreements refer to contracts or understandings made directly between two or more parties, often without the oversight of a public exchange or centralized clearinghouse.