ABC, a US-based corporation enters into a currency basis swap with XYZ, a British company, in which the initial principal amounts are $200 million and £ 100 million. That is:
-At inception, there is an initial principal exchange in which ABC pays XYZ $200 million and receives £ 100 million.
-Subsequently, at each interest payment date ABC pays XYZ the GBP-Libor rate on £ 100 million, and receives the USD-Libor rate on $200 million.
-Fnally, at maturity, a re-exchange of principals occurs in which ABC pays XYZ £ 100 million in exchange for $200 million.
Suppose the spot exchange rate is $1.55 = £ 1 at the time of entering into the swap. Assume that ABC and XYZ both have AA credit ratings at this time and can access funds at Libor flat. Then, from a credit perspective,
A) ABC is carrying more counterparty risk than XYZ.
B) ABC is carrying less counterparty risk than XYZ.
C) Both sides are carrying the same credit risk.
D) Neither side is carrying any credit risk.

Question

ABC, a US-based corporation enters into a currency basis swap with XYZ, a British company, in which the initial principal amounts are $200 million and £ 100 million. That is: 
-At inception, there is an initial principal exchange in which ABC pays XYZ $200 million and receives £ 100 million.
-Subsequently, at each interest payment date ABC pays XYZ the GBP-Libor rate on £ 100 million, and receives the USD-Libor rate on $200 million.
-Fnally, at maturity, a re-exchange of principals occurs in which ABC pays XYZ £ 100 million in exchange for $200 million.
Suppose the spot exchange rate is $1.55 = £ 1 at the time of entering into the swap. Assume that ABC and XYZ both have AA credit ratings at this time and can access funds at Libor flat. Then, from a credit perspective,
A) ABC is carrying more counterparty risk than XYZ.
B) ABC is carrying less counterparty risk than XYZ.
C) Both sides are carrying the same credit risk.
D) Neither side is carrying any credit risk.

Quizplus · Accepted Answer

The Answer of ABC, a US-based corporation enters into a currency basis swap with XYZ, a British company, in which the initial principal amounts are $200 million and £ 100 million. That is: 
-At inception, there is an initial principal exchange in which ABC pays XYZ $200 million and receives £ 100 million.
-Subsequently, at each interest payment date ABC pays XYZ the GBP-Libor rate on £ 100 million, and receives the USD-Libor rate on $200 million.
-Fnally, at maturity, a re-exchange of principals occurs in which ABC pays XYZ £ 100 million in exchange for $200 million.
Suppose the spot exchange rate is $1.55 = £ 1 at the time of entering into the swap. Assume that ABC and XYZ both have AA credit ratings at this time and can access funds at Libor flat. Then, from a credit perspective,
A) ABC is carrying more counterparty risk than XYZ.
B) ABC is carrying less counterparty risk than XYZ.
C) Both sides are carrying the same credit risk.
D) Neither side is carrying any credit risk.

ABC, a US-Based Corporation Enters into a Currency Basis Swap