Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate Edition
VIII. Topics in Corporate
Finance
- Risk Management: An
Introduction to Financial
Engineering
© The McGraw−Hill^815
Companies, 2002
Credit Risk Another important thing to remember is that with a forward contract, no
money changes hands when the contract is initiated. The contract is simply an agreement
to transact in the future, so there is no up-front cost to the contract. However, because a
forward contract is a financial obligation, there is credit risk. When the settlement date
arrives, the party on the losing end of the contract has a significant incentive to default on
CHAPTER 23 Risk Management: An Introduction to Financial Engineering 789
FIGURE 23.8
Risk Profile for an Oil
Buyer
Poil
V
Risk profile
FIGURE 23.9
Hedging with Forward
Contracts
Risk
profile
Poil
V
Payoff profile
for forward contract
Resulting
exposure