1.Credit risk in a swap can be reduced by all of the following EXCEPT:

A)   netting agreements.

B)   increasing the floating rate to account for credit risk.

C)   marking to market periodically.

D)   marking to market when a trigger point is reached.

2.Under a netting agreement swap, credit risk is:

A)   unaffected.

B)   reduced with respect to a counterparty bankruptcy.

C)   reduced, except in the case of counterparty bankruptcy.

D)   increased, in some special cases.

3.Netting and marking to market are:

A)   features of standardized futures contracts.

B)   ways to reduce the credit risk in swaps transactions.

C)   essentially the same thing.

D)   are not effective with a high credit risk firms.

1.Credit risk in a swap can be reduced by all of the following EXCEPT:

A)   netting agreements.

B)   increasing the floating rate to account for credit risk.

C)   marking to market periodically.

D)   marking to market when a trigger point is reached.

The correct answer was B)

Increasing the floating rate will not decrease the potential for default and may increase the amount at risk. Netting agreements and marking to market will reduce the amount of credit risk.

2.Under a netting agreement swap, credit risk is:

A)   unaffected.

B)   reduced with respect to a counterparty bankruptcy.

C)   reduced, except in the case of counterparty bankruptcy.

D)   increased, in some special cases.

The correct answer was B)

Under a netting agreement, swap credit risk is reduced with respect to a counterparty bankruptcy. Only the net difference in payments owed is at issue, compared to a situation where a party has a claim against the bankrupt firm's assets but has a liability to the bankrupt firm in the full amount of the gross payments owed to the firm on swaps.

3.Netting and marking to market are:

A)   features of standardized futures contracts.

B)   ways to reduce the credit risk in swaps transactions.

C)   essentially the same thing.

D)   are not effective with a high credit risk firms.

The correct answer was B)

Netting and marking to market reduce the credit risk in swaps transactions and are often used with lower credit counterparties to lower potential credit risk.