Question

Which of the following statements regarding early termination of a forward contract is most accurate?

A. Early termination through an offsetting transaction with the original counterparty eliminates default risk.
B. A party who terminates a forward contract early must make a cash payment.
C. A party who enters into an offsetting contract to terminate has no risk.

Answer 1

Answer: A. Early termination through an offsetting transaction with the original counterparty eliminates default risk.

Step-by-step explanation:

A Forward contract is an agreement between two parties that obligates one party buying the asset that the seller will sell at a certain price and at a certain point in future.

If the contract is terminated early but there is an offsetting transaction which mirrors the contract obligation then that means that the obligation has been settled and so the default risk which is the risk that one party was not going to fulfil their obligation will be eliminated.