MtM and Exposure for Netting

[Arka Bose]

Hi, I was reading Gregory from the notes where I came across one confusing part.

Now the red encircled one is I think contradictory to what is written here:

I believe the first image has wrong info? as I dont see the reason why there is not going to be any negative MtM value in case of a currency forward/cross currency swap payer paying a low rate of currency. If I am wrong can you help me out please?
Thanks in advance

 

[David Harper CFA FRM]

Hi @arkabose Yes, agreed. Your circled item is from the source (Gregory) and it's not listed in his errata that I can see (http://cvacentral.com/books/credit-value-adjustment/errata/). However, I agree with you. This looks like a mistake to me (sorry). Your second paragraph, of course, is CORRECT: in a fixed cross-currency swap, the counterparty who pays the higher interest rate has a positive expected future M2M; i.e., the higher relative rate, per interest rate parity, implies the depreciating currency such that the terminal principal swap has positive expected value to the higher rate payer.

As you suggest, the second paragraphs makes perfect sense to me, while it appears the bulleted point should read "...cross-currency swaps paying currency with the higher interest rate [are more likely to have a future positive MtM; i.e., future credit exposure]." Thank you!