Answer: Increase only for Credit Agricole

## Explanation In this interest rate swap scenario: - **BNP Paribas** is the **pay-fixed** counterparty (receives floating rate) - **Credit Agricole** is the **receive-fixed** counterparty (pays floating rate) - The forward spot curve is initially **upward-sloping** - **LIBOR starts trending down** and the forward spot curve **flattens** ### Analysis: 1. **When LIBOR trends down**: - The floating rate payments decrease - BNP Paribas (pay-fixed, receive-floating) receives less on the floating leg - Credit Agricole (receive-fixed, pay-floating) pays less on the floating leg 2. **When the forward spot curve flattens**: - The expected future floating rates decrease - This makes the fixed-rate payments relatively more valuable 3. **Credit risk impact**: - **Credit Agricole** (receive-fixed) now has a more valuable position because they receive fixed payments that are higher than the declining floating rates - If BNP Paribas defaults, Credit Agricole would lose this valuable position - Therefore, **credit risk increases for Credit Agricole** - For BNP Paribas, their position becomes less valuable, so credit risk decreases **Correct Answer: B** - Increase only for Credit Agricole The credit risk increases for the counterparty who has the "in-the-money" position, which in this case is Credit Agricole as the receive-fixed counterparty when rates are declining.

Author: LeetQuiz .