Credit risk in the swap market

Question

Quizplus · Accepted Answer

Credit risk in the swap market is limited to the difference between the values of the fixed rate and floating rate obligations. This is because if one party defaults, the other party will continue to receive their fixed rate payments, but they will not receive the floating rate payments that they were expecting from the defaulted party. Therefore, the credit risk is limited to the difference between the two payments. Option A is incorrect because credit risk in the swap market is not necessarily extensive. Option C is incorrect because the total value of payments that the floating rate payer was obligated to make does not necessarily represent the credit risk in the swap market. Option D is incorrect because while option A is partially true, option C is not accurate.

Credit Risk in the Swap Market