Figure 239

Hedging with Forward Contracts

Credit Risk Another important thing to remember is that with a forward contract, no money changes hands when the contract is initiated. The contract is simply an agreement to transact in the future, so there is no up-front cost to the contract. However, because a forward contract is a financial obligation, there is credit risk. When the settlement date arrives, the party on the losing end of the contract has a significant incentive to default on

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

23. Risk Management: An Introduction to Financial Engineering

© The McGraw-Hill Companies, 2002

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