PFE for swaps

[Tipo]

R46.P2.T6.Gregory_v7 pg58

I dont quite understand the graph shown here
Is it interpreted this way?
Assuming a Bank enters into a (1)payer swap with c/p or (2) receiver swap with c/p

(1)
the bank pays net cf (fixed) initially but receives net cf(floating) later stage. Thus his mtm for the entire contract goes from + to 0 (end of contract). At an earlier stage, the PFE is higher(positive,>0), because if the c/p defaults, the bank does not receive the later net cfs (floating)

(2)
the bank receives net cf (fixed) and pays net cf (floating) later. Thus his mtm for the entire contract goes from - to 0 (end of contract). At an earlier stage, the PFE is lower (negative,<0), because if the c/p defaults, the bank does not have to pay the later net cfs (floating)

(3)
how do we interpret a negative PFE? A negative worst case gain? What does that mean?

 

[QuantMan2318]

You are almost spot on!
The second is just a mirror image of the first, the same transaction from the viewpoint of the fixed receiver, as the receiver swap receives the Net rate(Fixed) initially and is expected to pay the Net(Floating) in the future, the exposure is the opposite of the expected gains to be received in the future as in the case of the payer swap and thus its the maximum expected payment in the future.

I basically see the negative PFE as a purely mathematical construct. If we take the payer swap as the vantage point, then the counter-party is the fixed receiver itself and therefore when the fixed receiver defaults, the PFE of the Fixed payer becomes the negative PFE of the Fixed receiver.