____ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party.

Question

Quizplus · Accepted Answer

Credit risk is the risk of default by the counterparty in a swap agreement. In this case, the affected party can discontinue its payments to the other party if they default, making the credit risk manageable. Basis risk relates to an imperfect correlation between the two legs of the swap, and sovereign risk is the risk of default by a government. Neither of these is relevant to the given scenario.

____ Risk in a Swap Is Typically Not Overwhelming Because