Credit Loss

[amanpereira]

In a currency swap involving exchange of notional principals wd the notional principal amount also be considered for amount at risk for credit loss or is it still on limited to current value (the gain amount)

Thx

[Tactics]

I’m pretty sure it’s the gain amount. E.g., let’s say I gave you $1,000 and you gave me CAD$1,100 as part of the initial exchange. A month later, my position gained and yours lost. If you fail to pay me back, I still have the CAD$1,100 to pawn.

[Moosey]

@Tactics

I’m pretty sure it’s the gain amount. E.g., let’s say I gave you $1,000 and you gave me CAD$1,100 as part of the initial exchange. A month later, my position gained and yours lost. If you fail to pay me back, I still have the CAD$1,100 to pawn.

Interesting. I would have said the total amount is the credit risk and your CAD 1,100 is the collateral.

But I don’t remember the curriculum discussing the issue of principal separately. However the currency swap is bilateral credit risk I recall. How else would it be bilateral?

[faisalq]

i think the full NP is at risk. Not heard of netting at end of currency swap. And credit risk is highest at end of term.

[Tuchsford]

If you exchange notional at inception, as you do with currency swaps, counter party risk is on entire amount. During the term of the swap, if your position is in a gain position, your counter party risk increases by amount of gain, so total risk is notional + gain; if in loss position, total risk would decrease (notional - loss). Note, this doesn’t take into account risk from receiving periodic interest payments. At end, you exchange back notional principal.

[Tuchsford]

@JohnBrown

<!–td {border: 1px solid #ccc;}br {mso-data-placement:same-cell;}–> 15+ year credit history. I use my credit cards for almost everything and pay off the balance every month. I took out some big loans for grad school and paid it off in a little over a year. We also have a jumbo mortgage and have never missed a payment. To summarize: we borrow a lot and pay it back on time.

I think you posted in wrong channel, otherwise not sure what your comment has to do with the OP’s question.

[ov25]

@amanpereira

In a currency swap involving exchange of notional principals wd the notional principal amount also be considered for amount at risk for credit loss or is it still on limited to current value (the gain amount)

Thx

Im not sure if there is a gain situation especially incase in which notionals are swapped. Its pretty much fixed ie the rates are agreed to upfront. The Credit risk is the amount owed to you I believe.