Which of the following carry greater counterparty risk: a forward contract on a 10 year note, or a commercial paper carrying a AA credit rating with identical maturity and notional?

Which of the following carry greater counterparty risk: a forward contract on a 10 year note, or a commercial paper carrying a AA credit rating with identical maturity and notional?
A . The forward contract has greater credit risk as its future gains are unknown
B . Credit risk can not be compared in these terms
C . They both carry the same credit risk
D . The commercial paper has greater credit risk as the entire notional is outstanding

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Answer: D

Explanation:

The commercial paper has greater credit risk as the entire notional is outstanding. On the forward contract, only the replacement value of the contract, which normally would be a mere fraction of the notional, would be at risk.

Therefore Choice ‘d’ is the correct answer.