Credit exposure

[Anonymous]

(1) For a 10 year, $100 million notional amount, which one of the following swap position has the highest potential future credit exposure at the time specified ?

(a) Currency swap 3 yrs after inception.
(b) Currency swap 5 yrs after inception.
(c) Interest rate swap 3 yrs after inception
(d) Interest rate swap 5 yrs after inception.

(2) In 10 yr of swap when is highest potential future credit exposure in interest rate swap.

Can anyone pls let me know correct answers for both questions with explanation.

[varun]

Acc to me

ans for 1) should be b (as there is no exposure to the notional for an IRS as the notional amount is never exchanged but for a currency swap it is)

ans for 2) should be 7 years

Let me know if I was right or wrong in case you have the answers.

[Anonymous]

thank you Ringfence for your reply. Your answer is correct.

I came across other question of same type. I would appreciate if you can help me with this one too.

– Which of the following 10 year swaps has the highest potential credit exposure ?
(a) A cross currency swap after 2 years
(b) A cross currency swap after 9 years
(c) An interest rate swap after 2 years
(d) An interest rate swap after 9 years

Here answer is a.

In foreign exchange swap, the greater the passage of time, the greater the potential for a large favourable exchange rate movement. So according to this statement here option a is correct answer. But in previous question why was 5 yrs after inception and not 3 yrs ?

Thanks in advance

[Author]

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