Answer-first summary for fast verification
Answer: I. only
Only **Statement I** is true. - **I is true**: If the swap is fairly priced at inception, its market value is **zero** to both counterparties. - **II is false**: After the first payment exchange, the swap may still have a **nonzero market value** due to changes in interest rates. Current credit exposure is therefore not necessarily zero. - **III is false**: **Expected credit exposure** is based on positive exposure and is therefore **not negative**. It cannot be positive for one counterparty and negative for the other in the way stated. Hence, the correct answer is **A. I only**.
Author: Manit Arora
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Q-177.3. Company A, the fixed-rate payer, enters into an interest rate swap with Company B, the floating-rate payer. Company will pay 4.0% per annum in exchange for six-month LIBOR, with an exchange every six months. The swap rate term structure is upward-sloping; for example, the 6-month swap rate is 1.0%, and the five-year swap rate is 7.0%. Consider the following statements:
I. At swap inception, the market value of the swap is zero to both counterparties II. After the first netted payment (coupon) exchange, in six months, the current credit exposure will be zero to both counterparties III. The expected credit exposure, at the end of the first year, will necessarily be positive for one counterparty and negative for the other
Which of the statements are TRUE?
A
I. only
B
I. and II. only
C
I. and III. only
D
I., II. and III.
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