Which of the following is true for the party paying fixed in an interest rate swap? Assume no other transactions with the counterparty.
A) There is more credit risk when the yield curve is upward sloping than when it is downward sloping
B) There is more credit risk when the yield curve is downward sloping than when it is upward sloping
C) The credit exposure increases when interest rates decline
D) There is no credit exposure providing a financial institution is used as the intermediary

Question

Quizplus · Accepted Answer

When the yield curve is upward sloping there is an expectation that the early cash flows will be negative and that the swap will then have a positive value.This increases credit risk.

Which of the Following Is True for the Party Paying