A currency swap has more counterparty risk than an interest-rate swap because
A)Unlike an interest rate swap,the counterparties are usually in different countries,making the swap vulnerable to different legal systems.
B)Unlike an interest rate swap,the currency swap also involves an exchange and re-exchange of principal amounts,making the swap vulnerable to movements in exchange rates.
C)Foreign exchange markets have more credit risk than interest rate markets.
D)Each counterparty is less likely to default in its home currency than in a foreign currency.

Question

Quizplus · Accepted Answer

The mere fact that counterparties are in different countries does not increase counterparty risk.And currency swap counterparties are not any more likely to be in different countries than is the case with an interest-rate swap.It is because principal is exchanged in different currencies,resulting in more risk from currency fluctuations,that a sharp move in currency levels may result in damaging counterparty exposure.

A Currency Swap Has More Counterparty Risk Than an Interest-Rate