Solution-Is this current credit risk or potential credit

Is this current credit risk or potential credit risk

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Reference no: EM132474025

Problem: A share of Texas Instruments stock is currently worth $105.33. An investor enters a short position on a 6-month forward contract on the TXN stock with a dealer. The risk-free rate is 4% APR semi-annual compounding. (Assume discrete compounding.)

Two months later, the price of the stock declines to $103.85. 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 $113.85. 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 $113.85 as given in the second alternative?

Reference no: EM132474025

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Is this current credit risk or potential credit risk

Reference no: EM132474025

Reference no: EM132474025

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