cfa answer says the forward conversion with options avoids counterparty risk.
forward conversion with options is buying a put and selling a call. There is counterparty risk when buy a put.
is cfa answer wrong?
Take my answer with reserve but maybe they mean on mutually offsetting effect on counterparty risk on both options positions taken on same NP which is concentrated position. Thus, total counterparty risk is exactly 0.
Yes. Short a call, there is no counterparty risk. Buy a put, yes.
Still confused
Well. Maybe I might be wrong but if I:
Sell call for $10 on underlying of $100.00 ( - counterpraty risk)
Buy put for $10 on underlying of $100.00 (+ counterparty risk)
Then my put counterparty won’t proceed upon put execution
then I won’t proceed with call execution by another counterparty.
Both risks offset each other and thus total counterparty risk is 0 for me.
May look strange but at least it happens.
…and we are here talking about potential counterparty risk, not the actual one.
Thank you. It helps to hear different opinions.
Which CFA answer? I think we need more context for this. In my understanding, if they are exchange traded options- no counter party default risk; if OTC options- there is counter party default risk.