David, :lol:
Suppose you enter into an interest rate swap where you are receiving floating and paying fixed. Which of the following is true? (circle two)
(a) Your credit risk is greater when the term structure is upward sloping than when it is downward sloping.
(b) Your credit risk is greater when the term structure is downward sloping than when it is upward sloping.
(c) Your credit risk exposure increases when interest rates decline unexpectedly.
(d) Your credit risk exposure increases when interest rates increase unexpectedly.
The ans is (a) & (d).
David, could you explain briefly why the ans is (a) & (d), also if the question is vice versa (receiving Fixed, paying Floating).
Suppose you enter into an interest rate swap where you are receiving floating and paying fixed. Which of the following is true? (circle two)
(a) Your credit risk is greater when the term structure is upward sloping than when it is downward sloping.
(b) Your credit risk is greater when the term structure is downward sloping than when it is upward sloping.
(c) Your credit risk exposure increases when interest rates decline unexpectedly.
(d) Your credit risk exposure increases when interest rates increase unexpectedly.
The ans is (a) & (d).
David, could you explain briefly why the ans is (a) & (d), also if the question is vice versa (receiving Fixed, paying Floating).