At what point in a swap’s life is the credit risk in an interest rate swap the greatest? a. in the middle b. at the end, when largest payments are due c. at the beginning, becasue all payments remain d. it varies depending on the direction of interest rates Care to elaborate pls?
A Credit quality in pretty good at the beginning of the swap due to the initial analysis of the counterparty. Credit Risk is Highest in the middle because the credit quality could have deteriorated and there are still a significant amout of payments remaining on the swap Towards the end of the swap there are only a few payments which remain and credit risk decreases to a lower level
A because there are still lots of payments due but the counterparty can be in worse financial shape than at initiation of the swap contract. B would be true for currency swaps but not interest rate swaps C incorrect because swap is not worth anything at its initiation D is incorrect because direction will determine which side of the swap will face credit risk but has nothing to do with time in swap’s life
A same explanation as chadtap. You should be able to knock C off immediately on the list, because of the mechanics of how you price a SWAP.
a is correct thanks guys