FRM Part I · FRM Exam Part I · Swaps
A currency swap has been in place for some time. Which feature of a currency swap, compared with an otherwise similar interest rate swap in a single currency, makes its credit exposure generally larger?
Currency swaps typically carry larger credit exposure because principal in two currencies is exchanged at maturity, so exchange rate movements can make the final exchange very valuable to one side. A single-currency interest rate swap exchanges only net interest, with no principal exchange.
- AInterest payments are made more often in currency swaps
- BPrincipal amounts in two currencies are exchanged at maturity, so the exposure includes exchange rate movements on principalCorrect
- CCurrency swaps are always floating-for-floating
- DCurrency swaps cannot be netted under a master agreement
Explanation
In a currency swap the principals are exchanged at maturity, and their values in the two currencies can diverge through exchange rate moves, creating a larger potential exposure. Payment frequency, floating legs and netting are not the distinguishing reason.
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