Explanation:
When a swap dealer enters into a plain-vanilla swap as the receive-fixed party, they are:
Credit risk exposure occurs when the swap has positive value for the dealer - meaning the counterparty owes money to the dealer.
If new swaps are priced at 6%:
If new swaps are priced at 8%:
Therefore, the dealer faces credit risk exposure only when the swap value is positive, which occurs when new swaps are priced below the original 7% rate (i.e., at 6%).
Correct Answer: C
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Assume that swap rates are identical for all swap tenors. A swap dealer entered into a plain-vanilla swap one year ago as the receive-fixed party, when the price of the swap was 7%. Today, this swap dealer will face credit risk exposure from this swap only if the value of the swap for the dealer is
A
Negative, which will occur if new swaps are being priced at 6%
B
Negative, which will occur if new swaps are being priced at 8%
C
Positive, which will occur if new swaps are being priced at 6%
D
Positive, which will occur if new swaps are being priced at 8%
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