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LOS i, (Part 1): Evaluate swap credit risk for each party and over the life of the swap and distinguish between current credit risk and potential credit risk. fficeffice" />

Q1. Current and potential credit risk in a swap are:

A)   equal at all times over the term of a swap.

B)   not equal at the inception of the swap.

C)   greatest between payment dates.

Correct answer is B)

Current credit risk is the risk of not receiving a payment currently due, since there is none at the inception of the swap, current credit risk is zero. Potential credit risk is the risk that payments possibly due in the future will not be made.

 

Q2. Compared to an equity swap, a currency swap has credit risk that is:

A) greater, earlier in the swap.

B) greater, later in the swap.

C) approximately the same during the life of the swap.

Correct answer is B)

A currency swap has a final exchange of principal, moving the maximum credit risk later in the life of the swap.

 

Q3. The credit risk of an interest-rate swap is greatest:

A)   at the middle of the term.

B)   just before the final payment must be made.

C)   late in the term.

Correct answer is A)

The credit risk in an interest-rate swap is greatest at the middle of the swap.