Question on Swaps

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Question on Swaps

Postby satyanandan.atyam » Fri Sep 07, 2012 2:30 pm

The Quiz on Swaps

BNP Paribas has just entered into a plain-vanilla interest-rate swap as a pay-fixed counterparty. Credit Agricole is the receive fixed counterparty in the same swap. The forward spot curve is upward-sloping. If LIBOR starts trending down and the forward spot curve flattens, the credit risk from the swap will:
Choose one answer.

a. Decrease for both BNP Paribas and Credit Agricole.

b. Increase only for BNP Paribas.

c. Increase for both BNP Paribas and Credit Agricole.

d. Increase only for Credit Agricole.

Answer is D...........Can anybody help me to understand

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Re: Question on Swaps

Postby shreyas » Mon Sep 10, 2012 12:57 pm

BNP will pay Credit Agricole a fixed rate of interest at every interval and will receive floating rate of interest from Credit Agricole that is LIBOR. Now it is said that LIBOR has started trending down which means BNP will end up paying more interest than receiving from Credit Agricole. The risk in this case is that BNP may default on its obligation since it is paying a higher rate of interest than the market, which increases credit risk for Credit Agricole.

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