Statement 1: The fixed rate payer in any plain vanilla interest rate swap is exposed to potential credit risk at the initiation of the swap but the floating rate payer is not. Statement 2: The long position is exposed to potential credit risk in a payer swaption at initiation but the short position in a payer swaption is not. Are the 2 statements CORRECT with regards to credit risk? A) Statement 1 - YES; Statement 2 - NO B) Statement 1 - YES; Statement 2 - YES C) Statement 1 - NO; Statement 2 - NO D) Statement 1 - NO; Statement 2 - YES
Why would statement # 2 be a YES?
#2 is yes because they are talking about swaptions. The swap short has already collected the premium for selling the swaption. No matter what happens in the market he will not get anymore payments. T/G
i want to say until someone puts the contract to you and you actually have to enter into a swap, the credit risk isn’t there yet- you already got your premium when you sold it so no credit risk? something like that. my eloquence in terms of understanding/explaining swaps is minimal at best. i’m fumbling through trying to get myself to a happy place come test time.
That makes sense … thanks trader/god The correct answer is D