For a FX forward contract, what would be the worst time for a counterparty to default (in terms of the maximum likely credit exposure)

For a FX forward contract, what would be the worst time for a counterparty to default (in terms of the maximum likely credit exposure)
A . At maturity
B . Roughly three-quarters of the way towards maturity
C . Indeterminate from the given information
D . Right after inception

View Answer

Answer: A

Explanation:

With the passage of time, the range of possible values the FX contract can take increases. Therefore the maximum value of the contract, which is when the credit risk would be maximum, would be at maturity. (Note that this is different than an interest rate swap whose value at maturity approaches zero.) Therefore Choice ‘a’ is the correct answer and the others are incorrect.