Banking · Foreign Exchange Risk
To hedge a 50 million USD remittance expected in 90 days, Universal Bank (UB) considers an OTC Forward Contract or Exchange-Traded Currency Futures. Which risk is most difficult for UB to manage specifically if it chooses the Forward Contract route?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The risk that the Forward Contract rate is higher than the spot rate on the 90th day (Market Risk).
- 2The risk that the 50 million USD remittance amount is not received exactly on the 90th day (Basis Risk).
- 3The risk that the counterparty to the Forward Contract may default before settlement (Counterparty Risk).✓
- 4The risk of the USD/INR exchange rate moving adversely over the 90-day period.
Correct answer
The risk that the counterparty to the Forward Contract may default before settlement (Counterparty Risk).
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