credit risk in interest/currency swaps

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chen36051

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When is credit risk highest in interest swaps/currency swaps?
Thanks.
 
off the top of my head - interest rate swaps- in the middle- credit position may’ve changed significantly since swap initiation and significant payments may still remain.
Currency swaps - towards the end, because the large notional principal is exchanged…
 
Once you enter it there is high chance of a party (on either side) defaulting especially in the middle of the swap.
 
smileygladhands Wrote:
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> Currency swaps - towards the end, because the
> large notional principal is exchanged…
The large principal is exchanged at the beginning too.
 
right,but i dont see what the impact is on credit risk of the initial exchange of notional
 
At the beginning of either swap, current credit risk is at the lowest (because you wouldn’t enter into a swap with a counterparty with questionable creditworthiness) and the value = 0. However, potential credit risk is at the highest.
As someone said, credit risk peaks in the middle for interest rate swaps because there are many payments left. It peaks at the end for currency swaps because notional principal needs to be swapped.
 
The beginning is ‘s when both parties are solvent , otherwise the swap wouldn’t take place. The risk is either in the middle , when there is some time elapsed so things could have changed AND when a significant amount of interst payments still outstanding that the risk is highest for interst rate swaps.
Its only when a large sum of money is due later ( such as when prinicipal on currency swaps are due) , and the party cannot roll into new financing that you have high credit risk
 
also
from CFA mock
plain vanilla interest rate credit risk
“credit risk that will increase steadily over the life of the swap”
and this is definitely WRONG
according to CFA
potential credit risk is greatest in the middle, and does not increase throughout the life of the swap
 
You are correct smileygladhands.
http://www.analystforum.com/phorums/read.php?12,1149934,1150253#msg-1150253
posted by cpk:
beginning of all swaps - since the two sides are equated to have a 0 value - there is no immediate credit risk, but potential credit risk is present.
In an IR SWAP and Equity Swap ->
towards the middle of the swap - potential credit risk is the highest. (since there are a lot of payments still left to be swapped, and if a party is already in trouble, that is not going to reduce).
This risk belongs to the party that is to get the positive payoff.
FX Swap:
Credit risk is highest towards the end of the swap - since the principal payments need to be swapped in the opposite currency at the end, unlike in an IR or Equity Swap.
 
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