In a standard over-the-counter forward contract, who bears the primary default risk?

• A. The central clearing house.
• B. The counterparty to the forward contract.
• C. Both parties have no risk due to private contract.
• D. The regulator.

Answer: (B)

OTC forwards are private agreements with no central guarantor, so credit risk is bilateral. The primary default risk lies with the counterparty—the entity you’ve agreed to trade with—because they are obligated to perform at maturity and there’s no clearing house to guarantee that performance. If this were a cleared contract, the central counterparty would assume that risk, but in a standard OTC forward it rests with the other party. Collateral can reduce exposure but doesn’t eliminate it, and regulators don’t directly bear the contract-level default risk.