Which of the following statements is true?

Question

Quizplus · Accepted Answer

Both statements in options A and B are partially correct but incomplete. Swap participants do deal with credit risk of counterparties by setting bilateral limits on the notional amount of swaps entered into, but they also adjust the fixed and/or floating rates by including credit risk premiums. Therefore, option D combines both approaches and provides a more accurate description of how swap participants deal with credit risk. Monte Carlo simulations can also be used to model potential default risk, but this is not a typical approach to managing credit risk for swaps.

Which of the Following Statements Is True