Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has a AAA credit rating,but company Y's credit standing is considerably lower.
A)Company X should demand most of the QSD in any swap with Y as compensation for default risk.
B)Since Y has a poor credit rating,it would not be a participant in the swap market.
C)Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation.
D)Company X should demand most of the QSD in any swap with Y as compensation for default risk,and Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation.

Question

Quizplus · Accepted Answer

Company Y's lower credit rating makes it a riskier counterparty in any swap transaction. As such, Company X should demand most of the Quality Spread Differential (QSD) as compensation for default risk. Additionally, the presence of a swap bank providing credit risk intermediation could make Company X more willing to engage in a swap with Company Y, as the swap bank can assume some of the default risk and make the overall transaction less risky for Company X. Therefore, both statements in choice D are valid.

Company X and Company Y Have Mirror-Image Financing Needs (They