Asked by Widelyne Loiseau on Jun 29, 2024
Verified
Credit risk in the swap market
A) is extensive.
B) is limited to the difference between the values of the fixed rate and floating rate obligations.
C) is equal to the total value of the payments that the floating rate payer was obligated to make.
D) is extensive and equal to the total value of the payments that the floating rate payer was obligated to make.
E) None of the options are correct.
Credit Risk
The risk that the bond will not make all of its promised payments; default risk.
Swap Market
A market in which individuals, businesses, and institutions exchange financial instruments, like interest rates or currencies.
Fixed Rate
An interest rate that remains constant over the life of a loan or investment.
- Understand credit risk in the swap market and the limitations thereof.
Verified Answer
MA
Manal Al amodiJul 04, 2024
Final Answer :
B
Explanation :
Credit risk in the swap market is limited to the difference between the values of the fixed rate and floating rate obligations, not the total value of the payments. This is because the risk is based on the net difference at any point in time, not the gross payment flows.
Learning Objectives
- Understand credit risk in the swap market and the limitations thereof.