Credit Risk

[FrankCFA]

Which of the following will have the least amount of credit risk? A:
A) pay-fixed position in a plain-vanilla interest rate swap.
B) short option position.
C) either position in a plain-vanilla currency swap.

 

[The Song of the]

B - credit risk in options is one-sided; the seller is paid immediately and has no credit risk

 

[FrankCFA]

Yes, it’s B.
But I was thinking sell option to get premium still need to wait for 2 days to get the cash. Does it belong to credit risk? (for any reason, option buyer doesn’t pay the premium.)

 

[Miamia]

that would be settlement risk? You think too much.

 

[FrankCFA]

Miamia wrote:
that would be settlement risk? You think too much.

Thanks. Agree…

 

[OMGMileyCyrus]

Yup - I think (B), as well. Credit risk is one sided in option contracts, so if we write an option contract we’ll be compensated immediately through the premium payment from the buyer of the option contract. The buyer of the option contract will be exposed to the credit risk that we will not deliver shares or payment if the contract is exercised by the option buyer. As such, credit risk is the lowest in this scenario.
Hope this helps!
OMGMileyCyrus