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Answer: Credit risk is not contingent on market risk
The **exception** is **D**. - **A is true**: Counterparty A has current credit exposure only when the swap has a **positive value to A**. - **B is true**: The swap’s market value to one party is the **negative** of the market value to the other party. - **C is true**: **Market risk** concerns changes in value; **credit risk** concerns the possibility of default when one party is owed money. - **D is false**: Credit risk **is contingent on market risk**, because exposure arises from the swap’s market value. If the market value is not positive, there is no current credit exposure for that party. So the correct answer is **D**.
Author: Manit Arora
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Q-177.2. With respect to an interest rate swap where Counterparty A is the fixed-rate payer and Counterparty B is floating-rate payer, EACH of the following is true EXCEPT:
A
Counterparty A only has current credit risk exposure when the value to A is positive; i.e., when A is "in the money"
B
At any given time, if +M is the market value of the swap to Counterparty A, then the market value to Counterparty B is –M
C
The credit risk of the swap is distinct from the market risk of the swap
D
Credit risk is not contingent on market risk
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