Current VS Potential Credit Risk

CFA Level III Derivatives
#1

Currency swaps have two-sided current credit risk on settlement dates due to no netting, but how about potential credit risk? Is it also two-sided?

Schweser says American options, even though they can be exercised prior to expiration, do not have current credit risk unless actually exercised. Is this correct?

#2

I’m not completely sure about the currency swaps, but I would think yes.

I believe american options always have current credit risk so long as they have value and you are the LONG.

#3

Agree with chuck, American options have current credit risk

#4

In currency swaps, potential credit risk is two-sided.

American options _ do not _ have current credit risk unless exercised; nobody owes the option holder anything unless the option is exercised.

#5

That sounds logical but CFAI seems to take different approach. There was one question on the mock exam and current credit risk of American option was its current market price. For reference, I don’t recall which mock was that but the price was 8.50.

#6

That’s one for me to remember. Thanks.

#7

Thanks! Which financial instrument has current credit risk before expired?

#8

  • swaps on a payment date

  • bonds

#9

I think, since Interest payments are in different ccy, so has to be two sided in ccy swap.

#10

bonds have current credit risk? I thought only potential?

#11

well on coupon dates they certainly do.

#12

And on final maturity as well.