SWAP: Risk

Current and potential credit risk in a swap are: A) not equal at the inception of the swap. B) equal at all times over the term of a swap. C) greatest between payment dates. D) less for the fixed rate payer.




a…i can’t figure out how there would be any current risk when no payments are due etc., but plenty of potential risk as the whole contract awaits.

mwvt, Dinesh, even I got duped by this question

Does that mean we all did besides rekooh?

i second a. current and potential credit risks are not equal.

Yeah, C can’t be right.

good question ----- time for GTA and fearless killing of pedestrians.

Its A. Current credit risk is the risk of not receiving a payment currently due, since there is none at the inception of the swap, current credit risk is zero. Potential credit risk is the risk that payments possibly due in the future will not be made.

I agree… A. Current Risk at inception=0, however there will be potential credit risk once the values to each side change.

Credit risk for a SWAP is maxed in the middle of the duration, however this question is poorly worded.

Yes Usif, but credit risk is made up of two components and they are asking about the difference between the two. Also the credit risk on a currency swap is more towards the end.