# Credit risk - which party

I need some help on this one. If A purhcased a receive fixed, pay float swap (not currency), the current market value is (\$100) which party has 1. current credit risk 2. potential credit risk and lastly, 3. credit risk Also, know this has been discussed before but couldn’t find the thread, in sample exam version 2, the same swap type question. The question specifically asked for current credit risk, why is it not 0? Any input will be appreciated.

dude it depends on the interest rate. if LIBOR>fixed than float receiver has potential or current credit risk. and that depends on if the payment is due now or in the future. 3. is a general for 1. and 2.

You don’t need those things coz I already give you market value…and the reason why there is no fixed > LIBOR or LIBOR > fixed is because that’s how the quesiton is asked, if LIBOR or fixed rate were specifided then I won’t be confused… I understand 3 is a general for 1. and 2. but my questions is if the questions only ask you credit risk, what will your answer be? Obviously 1 is 0 and another is (\$100)

bump, help?

takumi Wrote: ------------------------------------------------------- > I need some help on this one. > > If A purhcased a receive fixed, pay float swap > (not currency), the current market value is > (\$100) > > which party has > 1. current credit risk > 2. potential credit risk > > and lastly, > 3. credit risk credit risk = current and potential in case of the swap< potential = -\$100 is to the person with the received FLR there will only be current when there is an actual cash settlement required.

Thanks > credit risk = current and potential Agree, so in this case credit risk = 0 + (-100) = -100 > in case of the swap< potential = -\$100 is to the > person with the received FLR So in this case, counterparty of A bears the credit risk? > there will only be current when there is an actual > cash settlement required. This is what confuse me, in the sample exam, it clearly says what is the “current” credit risk? There was no cash settlement and yet, there is credit risk…

Is LIBOR currently different than the SFR?

SFR? Fixed rate? In the example, yes, hence the market value is (-\$100) but unfortunately, the question doesn’t tell you that… this is why i’m so confused…

takumi Wrote: ------------------------------------------------------- > Thanks > > > credit risk = current and potential > Agree, so in this case credit risk = 0 + (-100) = > -100 > > in case of the swap< potential = -\$100 is to > the > > person with the received FLR > > So in this case, counterparty of A bears the > credit risk? The Edge: i presume from your earlier notation that (\$100) means -ve? without seeing the full question that the PV is negative to party A - hence it is the other party that bears the potential credit risk > > there will only be current when there is an > actual > > cash settlement required. > > This is what confuse me, in the sample exam, it > clearly says what is the “current” credit risk? > There was no cash settlement and yet, there is > credit risk… hmm… there is zero current credit risk, unless somewhere in the question it alludes to party A not having received the previous quarterly settlement of the swap. check out schweser/cfa notes … it is only current if there is actual cash payment - like a settlement of a fx deal.

takumi Wrote: ------------------------------------------------------- > I need some help on this one. > > If A purhcased a receive fixed, pay float swap > (not currency), the current market value is > (\$100) Here is how to approach this problem 1) receive fixed, pay float swap means you are short 2) the market value of the swap is -\$100, hence it is positive for the short 3) short has potential credit risk 4) credit risk = current credit risk + potential credit risk (you can’t have both current and potrential at the same time) a) credit risk = current credit risk + \$0 b) credit risk = \$0 + potential credit risk 5) in this problem, credit risk = 0 + potential creit risk = \$0 + \$100 = \$100 (i.e., credit risk to the short is \$100)

volkovv, what about that mock stuff

haven’t taken, so can’t comment yet I maybe proved wrong, but my explnation holds under normal circumstances

Thanks. That’ll make sense. with the last question, unfortunately, I don’t understand either. In the sample question, it specified current credit risk, yet there is a figure… anyway, thanks volkovv