When you sell swaption, as long as you receive the option fee at the beggining of the trade, the credit risk seems zero.
But actually if the counterpaty exercise the swaption and the swap position becomes winning from our viewpoint, we are exposed to the credit risk. However, schweser practice exam 1-Afternoon of vol1 is thinking as no risk.
Can we say this is no credit risk? or I should devide the credit risk for swaption and swap in this case?
If you sold a swaption, that means you’re being paid up front for the option on the swap. Therefore, no risk to your position if it’s gained, you’ve already collected it at t=0
Yeah, i see until that point. Then, in case counterparty exercise, we are required to enter into swap. After that if we are in winning position, obviously we hold the counterparty risk. Is this case not considered in the question? that is my point.
You’re describing the risk on the swap, not the swaption. Two distinct concepts.
true, thanks both!