Credit risk in currency swaps

[zript]

Hi,

Looking to the below previous FRM exam question

Which of the following os most accurate regarding the credit risk of a currency swap?

1.domestic currency leg increases, so does the credit risk of the foreign currency payer
2.domestic currency leg increases, so does the credit risk of the domestic currency payer
3.foreign currency leg increases, so does the credit risk of the foreign currency payer.
4.foreign currency leg increases, so does the credit risk of the domestic currency payer.

There were 4 possible answers

A. 1 and 3
B. 1 and 4
C. 2 and 3
D. 2 and 4

I have answered C (2 and 3) but I discovered that the correct answer is B ( 1 and 4) I dont know why

Let's take the first affirmation which seems to be one of the most accurate regarding credit risk of a currency swap. If you are the foreign currency payer in a swap and the domestic currency increases, this means that the domestic currency has appreciated regarding the foreign currency and then the foreign currency value depreciates. The consequence of this is that you receive more domestic and pay less foreign.

How it is possible then that the credit risk of the foreign currency payer could be higher in this case?

Could you please tell me where I am wrong?

Thanks,

 

[[email protected]]

because the counterparty will pay u more now, so ur credit risk exposure is actually higher than before.