If you are short a swap and the swap has a -$100k value, do you have credit riks? If you are short a swap and the swap has +$100k value, do you have credit risk? I guess is the same question. Also, is this current or potential credit risk? Methods to mitigate?
speaking of which, i have a few questions: forwards only have potential credit risk, right? european options also only potential?
short a swap, current mv is -100k, you have credit risk. because you are short the security and current value is negative (from long perspective), longer owes you money. you are at the risk. it is hte current credit risk.
short something (a swap) with negative value = gain for you = credit risk for you (in this case, potential) short a something (a swap) with positive value = loss for you = credit risk for the other (in this case, potential) mitigate… collateral, mark to market, etc forwards only have potential credit risk, as far as I know european options only have potential credit risk, I think that is right
Yes, european option only have potential credit risk. Tommy, I agree with you, for some reason i thought sample 1 had a question on this and the short swap side had a position negative value (-$384k) or so and it said it had no risk. It must be rememebring it wrong.
tommy…for these swaps, i think they would only have potential credit risk, except for the part of the MV which is a payment which is currently due, which would be current credit risk. (i.e. the whole MV is not current credit risk) …do you agree?
prockets Wrote: ------------------------------------------------------- > tommy…for these swaps, i think they would only > have potential credit risk, except for the part of > the MV which is a payment which is currently due, > which would be current credit risk. (i.e. the > whole MV is not current credit risk) > > …do you agree? tough call prockets. on exam i would go with all MV, unless i sensed they gave current payment and wanted us to deduct
Only the PV is CURRENT CREDIT risk. I think we starting throwing in MV that that was a mistake, at least on my part. What do you mean I would go with ALL MV?
ChiTownShane Wrote: ------------------------------------------------------- > Only the PV is CURRENT CREDIT risk. I think we > starting throwing in MV that that was a mistake, > at least on my part. > > What do you mean I would go with ALL MV? mkt value = current credit risk only if you mark to market the swap on that settlement date if not, you will have some payment = current credit risk, but the swap will still have a potential credit risk. For example, if I pay you LIBOR quarterly, and AT MATURITY in one year you pay me the performance of the s&p500, on each settlement date there is current credit risk for you as I must pay you, but the overall credit risk of the swap will be determined by the market value
agreed hala…you’d only have current credit risk for a swap on the settlement dates.
prockets Wrote: ------------------------------------------------------- > agreed hala…you’d only have current credit risk > for a swap on the settlement dates. agreed
comp_sci_kid Wrote: ------------------------------------------------------- > prockets Wrote: > -------------------------------------------------- > ----- > > agreed hala…you’d only have current credit > risk > > for a swap on the settlement dates. > > > agreed +1 These are the little subtleties that could easily show up. Swaps only have potential credit risk unless it is a settlement date. European options only have potential credit risk, but Americans have both since they can be exercised prior to maturity. You know CFAI will throw this in somewhere.
true…Swaps probably only have potential credit risk unles at the expiration…
in sample exam freebie, they said the currency option has credit risk, however, in the book there is an exercise saying European option doesn’t have current credit risk …
Since you guys are talking about interest rate derivatives, i have some question I hope I can get some help on. 1) For a Interest Rate Future. The price of the long position will drop if interest rate rise. 2) For a call option on interest rate future, the buy has the right to buy the future contract (Long Position) at the strike price. A cap is a serious of call on interest rate future. The cap are suppose to provide income to reduce the loss when interest rate rise. But as cap is a serious of call, according to 2), it will it will actually experience a drop in price. What did I get wrong here? Thanks in advance.
just to check my sanity, I don’t the there are calls on interest rate FUTURES on the test, on calls on interest rates…am I high? alfred…I think that question didn’t distinguish b/w current/potential, just credit risk in general. [btw…i’m also an actuary in pension…what field r u in?]
i had the same problem (thanks JoeyD): when they talk about interest rates futures, they mean bond futures. I guess you (as me) was thinking about FRAs or something like that (directly positively related to the level of interest rates) with int.rates futures, you are in the same position as holding a bond future, that goes down when int.rates go up and viceversa
and when they talk options for dynamic hedging i think they are talking about tresuries options
interest rate options are options on interest rates and that is what floorlets and caplets are.
Tha cap is a series of int rate OPTIONS, NOT FUTURES. So only credit risk is if you are long a cap and it has a +ve PV.