Current Credit risk in swap

CFA Level III
#1

You enter a swap with quarterly resets last month. Current MV of the swap is negative -(500,000). You pay fix receive floating. According to CFA current credit risk equals to 500,000 WHY?? I thought there is no current credit risk in swap only the potential one which equals current MV of swap

#2

If this is the question I think it is, I have a feeling they meant to say what is the current “credit risk” I screwed up too along with many others as we understood it as “current credit risk”…

#3

I think its because as a Fixed Payer / Float Receiver, you are short the Swap. So if the value to the short is -ve, that’s what you are owed.

#4

He’s talking about the “Current” vs “Potential” Pimp.

#5

i don’t think so pimp. i thought the MV of a swap is the value to the pay fixed. in this case, the value to the fixed payer is -500,000, so the fixed payer actually owes the fixed receiver money.

#6

I guess I need to read the question.

#7

now i’m confused…i thought (based on prior threads here) that if you’re a fixed rate payer, your’re long the swap (you’re long interest rates by receiving floating). I think the question above from the sample, they were short the swap, hence paying floating, which was why they had credit risk. am I totally screwed up?

#8

I think this one said Receive Fixed, Pay Floating

#9

pimp, can you please explain your logic

#10

Ok, Iam completely lost now I thought pay fixed in the swap means you short the swap

#11

CORRECTION - My notes say Pay Fixed, Receive Float = Long. Apologies for the error.

#12

I think pimp is right. The swap is always stated in terms of its relation to the fixed rate payer. If the value is -500,000, that means the pay fixed side owes the floating…ie the floating side faces the credit risk.

#13

The receive fixed side is the long side. If you receive fixed, you are long the swap. If you receive floating, you are short the swap. MV of a swap is in terms of the receive fixed side. If the MV is negative, that means the receive fixed side owes money to the receive floating side. Since the receive floating side is owed money, the receive floating side faces the credit risk. The MV of the swap is the potential credit risk, except on settlement dates. On settlement dates, there is current credit risk since a cash flow occurs. There is no potential credit risk on settlement dates because the cash flow will reset the value of the swap to zero.

#14

I just confused myself… nix the previous comment.

#15

Oh boy here we go, I’m staying clear of this one.

#16

i’m positive paying fixed is long a swap. in the CFA problem, they were short a swap with negative value, hence had value at risk if the counterparty defaulted.

#17

Re: Current Credit risk in swap new Posted by: hezagenius (IP Logged) [hide posts from this user] Date: June 3, 2008 04:18PM The receive fixed side is the long side. If you receive fixed, you are long the swap. If you receive floating, you are short the swap. MV of a swap is in terms of the receive fixed side. If the MV is negative, that means the receive fixed side owes money to the receive floating side. Since the receive floating side is owed money, the receive floating side faces the credit risk. The MV of the swap is the potential credit risk, except on settlement dates. On settlement dates, there is current credit risk since a cash flow occurs. There is no potential credit risk on settlement dates because the cash flow will reset the value of the swap to zero. ***************************** hezagenius-- I agree Answer also said that manager short the swap with negatibe market value. The only thing I don’t understand is why “answer” labeled it as current credit risk

#18

If the problem said today is a settlement date, then there would be current credit risk. If it is not a settlement date, there is only potential credit risk. Where is this problem? Is it a CFAI problem?

#19

sample 2

#20

I plan on doing this sample tomorrow. I will pay attention to see what the problem says. What does the solution say?