Economics · Financial Derivatives and Risk Management

Consider the following seven statements regarding financial derivatives and risk management: Statement 1: A forward contract is a customized bilateral agreement where the buyer agrees to purchase an underlying asset from the seller at a specific future date at a price agreed upon today, and unlike futures contracts, forwards are generally not regulated by an exchange and are subject to significant counterparty default risk unless collateralized through a credit support annex. Statement 2: The put-call parity is a fundamental principle in options pricing that defines the relationship between the price of a European call option and a European put option with the same strike price and expiration date, stating that the difference between the call and put price should equal the difference between the current spot price and the discounted value of the strike price. Statement 3: In a total return swap, one party makes payments based on a set rate while the other party makes payments based on the total return of a reference asset, which includes both the income generated by the asset and any capital gains or losses, effectively allowing an investor to gain exposure to the asset without owning it on their balance sheet. Statement 4: The mark-to-market process is a daily accounting requirement for banks where the value of all derivative positions is adjusted to reflect current market prices, resulting in a gain or loss that directly impacts the bank's profit and loss account and its regulatory capital ratios under the current expected credit loss framework. Statement 5: A synthetic long position can be created by simultaneously purchasing a call option and selling a put option with the same strike price and expiration date, which results in a payoff profile that closely mimics owning the underlying asset but requires a significantly lower initial capital outlay than a direct purchase. Statement 6: Credit valuation adjustment is an adjustment made to the risk-free value of a derivative contract to account for the possibility that a counterparty might default before the contract's maturity, and it is calculated based on the expected exposure, the probability of default, and the loss given default of the counterparty. Statement 7: The Mumbai Interbank Forward Offered Rate is a key benchmark for pricing cross-currency swaps and forward contracts in India, representing the sum of the London Interbank Offered Rate for the US Dollar and the forward premium for the USD INR exchange rate, but it is being phased out in favor of Modified MIFOR. Based on the statements above, which of the following represents a correct evaluation?