I know that credit risk is highest AFTER the middle of the term for a currency swap, however, is this point closer to the end of the term or closer to the middle of the term?
assume closer to the middle, since it’s the average expected cash flow timing. Half paid, half unpaid. If you’re at the end, there’s few payments remaining to be a risk. the time where you’re near the end, is when there is a large exchange, like if the notional is exchanged.
You cant really say. Its not really an exact science. Just need to know that it tends to be towards the latter half of contract period ( i.e between middle and end of contract ) Actual risk depends on exchange rate movements, obviously its possible that the exchange rates havent moved at all and you dont really have that much exposure.
I would think credit risk is greater near the end as notionals must be exchanged at the beginning and end of the xcurr swap as opposed to plain vanilla swaps That being said as long as u know it should be middle to end you should be fine
Assuming they ask…the time in the term of the currency swap where credit risk is the highest is closest to: a. Beginning b. Middle c. Ending Now what would you do? For all but currency, it would clearly by b. But for currency swap, it would be?
I would choose end since Large notional amounts are exchanged then
+1 Biggest risk for ccy swap is at the end because notionals are due to be swapped back.
Do you guys know if this is explicitly stated anywhere in the books or study guides? I worry because credit risk is made up of Potential Credit Risk and Current Credit Risk. I can see potential credit risk being dominate at middle for currency swap with the same logic you have mentioned (terminal swap back).
So what is the MORE correct answer? The middle or the end? If we are not given any exchange rate movements we should say the middle correct? If there has been a huge shift in currency rates since the start of the swap contract we should say end right?
Currency: end Other: middle