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FRM Part II · FRM Exam Part II · Future Value and Exposure

A risk manager compares the exposure profile of a 10-year cross-currency swap with exchange of notional at maturity to that of a single-currency interest rate swap of the same tenor. Which feature explains why the cross-currency swap's exposure is typically larger and peaks later?

The cross-currency swap's exposure is larger and peaks later because the principal is exchanged at maturity, leaving a large amount exposed to exchange rate moves with no amortisation until the end. A single-currency swap has no principal exchange and its exposure fades as payments are made.

  1. AThe final notional exchange exposes the bank to FX moves on a large principal amount that does not amortise until maturityCorrect
  2. BCross-currency swaps have no floating legs, so exposure is unaffected by rates
  3. CNotional exchange at maturity eliminates exposure by netting principal flows
  4. DCross-currency swaps are always collateralised, so exposure is smaller

Explanation

The large final exchange of principal in two currencies means FX moves create a big value difference that is not reduced by interim payments, so exposure grows toward maturity with a peak late in life. Single-currency swaps have no principal exchange and amortise. Netting of principal does not remove the FX difference.

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