Its essential for a financial manager to pay attention on the credit risk exposure when participating in an over-the-counter derivative contract. Consider a two-year forward contract to buy/sell EUR1,000,000. The forward rate was set at USD1.1500. The contract has 12 months to maturity. The current exchange rate is USD1.1000. The interest rates are 6% and 5% for the USD and the EUR, respectively.

Which party is bearing the credit risk and how much is the amount of credit risk exposure? Will the situation change over the next six months?