risk management Qs management, potential, interest

joehogue

1, Consider a plain vanilla interest rate swap with two months to go before the next payment. Six months after that, the swap will have its final payment.

The present value of the floating payments is $1.0222mm, and the present value of the fixed payments is $1.0210mm.

Which party assumes credit risk?

2, Is the current credit risk equal to the present value of the potential credit risk?
-- just updated.



Edited 2 time(s). Last edit at Friday, May 27, 2011 at 03:54PM by deriv108.

Roflnadal

1.) Value Receiving - Value Paying.

Credit risk to fixed rate payer.

2.) No.

strikethree

3. What is difference between centralized and decentralized risk management systems?
The advantages and disadvantages of each?

PalacioHill

4. You are French and own a portfolio of U.S. stocks worth $1 million. The current spot and one-month forward exchange rates are 1 euro per $. Interest rates are equal in both countries. You are worried that the results of U.S. elections could lead to a strong depreciation of the dollar and you decide to sell forward $1 million to hedge currency risk. A week later, your U.S. stock portfolio has gone up to $1.02 million, and the spot and forward exchange rates are now 0.95 euro per $.

a) If the portfolio had not been hedged, what is the return in euros?
b) If the portfolio had been hedged as described, what is the return in euros?

canadiananalyst

if it is a forward , you should list interest rate

jmh530

4a -3.1%
4b 1.9%

lcai

I think the reason they directly use forward price is that Interest rates are equal in both countries and a week time .

bodhisattva

bannisja Wrote:
-------------------------------------------------------
> yeah you guys are right- it's 1.9%... whoops, that
> extra .02mm you didn't hedge out at the 1/1.

1.9% is very close to 2.0%...could be good enough for an item set question, or at least a quick check.

Any shortcut to get the hedged return 1.9%?



Edited 1 time(s). Last edit at Friday, May 27, 2011 at 07:51PM by deriv108.

liangfeng

-3.1% + 5%

mar350

5. List of all the possible methods to manage currency risk?