What is replacement risk in the swap market?
A)The risk of substituting a defaulted swap with a new swap at less favorable terms.
B)The cost incurred by the swap dealer in replacing the defaulting party on the same terms as the original swap.
C)The risk involved in exchanging fixed interest payments for floating interest payments by two counterparties.
D)The risk associated with long-term hedge sometimes for as long as 15 years.
E)The comparative disadvantage faced by swap seller in making variable or floating rate payments.

Question

Quizplus · Accepted Answer

Replacement risk in the swap market refers to the risk that a counterparty defaults on the swap agreement, and the remaining party has to find a replacement counterparty to continue the swap. This replacement may occur at less favorable terms than the original swap, resulting in replacement risk.

What Is Replacement Risk in the Swap Market