Answer: both the long and the short positions.

## Explanation Forward commitments (such as forwards, futures, and swaps) create counterparty risk for **both the long and short positions**. This is because forward commitments are **binding obligations** for both parties to perform at a future date. ### Key Points: 1. **Forward Commitment Characteristics**: - Both parties are obligated to fulfill the contract - No upfront premium payment (unlike options) - Settlement occurs at maturity 2. **Counterparty Risk**: - **Long position risk**: Concern that the short position might default and fail to deliver the underlying asset - **Short position risk**: Concern that the long position might default and fail to pay for the underlying asset 3. **Contrast with Contingent Claims**: - Contingent claims (like options) give the holder the **right but not the obligation** to exercise - Only the option writer (seller) has an obligation if the holder chooses to exercise - The option buyer pays an upfront premium, so the writer faces no credit risk from the buyer 4. **Real-World Examples**: - **Forward contract**: Both parties risk the other defaulting - **Futures contract**: Clearinghouse mitigates but doesn't eliminate counterparty risk - **Swap**: Both parties risk the other failing to make periodic payments Therefore, forward commitments create bilateral counterparty risk, making option **C** the correct answer.

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