Suppose you enter into an interest rate swap where you are receiving floating and paying fixed. Which two of the following is true? choose two)
A) Your credit risk is greater when the term structure is upward sloping than when it is downward sloping.
B) Your credit risk is greater when the term structure is downward sloping than when it is upward sloping.
C) Your credit risk exposure increases when interest rates decline unexpectedly.
D) Your credit risk exposure increases when interest rates increase unexpectedly.

Question

Quizplus · Accepted Answer

When the term structure is upward sloping, the fixed rate you are paying is likely to be lower than the floating rate you are receiving, which means you are more likely to be in a net payment position. This increases your credit risk. When interest rates decline unexpectedly, the value of your floating rate payments will decrease, which will increase your credit risk exposure.

Suppose You Enter into an Interest Rate Swap Where You