Is this current credit risk or potential credit risk

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Reference no: EM132070859

A share of Procter & Gamble stock is currently worth $68.60. An investorenters a short position on a 6-month forward contract on the P&G stock with adealer. The risk-free rate is 4% APR semi-annual compounding. (Assume discrete compounding.)

• Two months later, the price of the stock declines to $65.85. Answer the following questions:

(a) Who bears the credit risk?

(b) Is this current credit risk or potential credit risk?

• Alternatively, suppose that two months later the price of the stock increases to $72.30.

Answer the following questions:

(a) Who bears the credit risk?

(b) Is this current credit risk or potential credit risk?

• Assume that the forward contract is marked-to-market every two months. What happens at the time of the first marking-to-market (two months after the initiation) if the stock price is $72.30 as given in the second alternative?

Reference no: EM132070859

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