CFA Level I · CFA Level I Exam · Pricing and Valuation of Interest Rate and Other Swaps
Compared with an interest rate swap, a currency swap most likely carries greater credit risk because:
A currency swap carries greater credit risk mainly because notional principal is exchanged in two currencies, so the amount at risk can become large when exchange rates move. Interest rate swaps typically net only the interest difference, leaving much smaller exposure.
- Aits payments are always floating
- Bit involves exchange of notional principal, so exposure can be largerCorrect
- Cit has no netting of any cash flows
Explanation
Currency swaps usually exchange notional principal at the end (and often the start), and the principal is in different currencies, so mark-to-market exposure can become large as exchange rates move. Interest rate swaps normally have no principal exchange and net payments.
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