Forward Contract with Lehman
Quantitative Finance
Level
1
You buy a May Gold Forward contract from a Lehman Brothers trader. What happens when Lehman collapsed?
Nothing. Your contract is with the exchange.
The SEC will guarantee your contract
The bankruptcy court will decide a suitable settlement
Your futures contract is invalidated
You sell it back for $0 because they are bankrupt.
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1 solution
Because a forward is with a specific buyer and seller, the forward contact you have bought is with the Lehman trader. They have an obligation to buy the underlying asset from you at a future date, however they are now insolvent (meaning they can no longer honour their debts). Consequently you sit in their list of creditors that will be settled as they go through bankruptcy proceedings.