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Answer: If the initial value and current exposure of a currency swap is zero; interest rate term structures are flat in both currencies; coupon payments are equal, then the expected credit exposure profile is zero over the life of the swap
The **false** statement is **C**. Why? - A currency swap usually begins with an exchange of principals, so **A is true**. - Currency swaps generally have **higher credit exposure** than plain vanilla interest rate swaps because principal is exchanged and payments are not usually netted, so **B is true**. - Interest payments in currency swaps are typically made in each currency separately, so **D is true**. - Statement **C** is not necessarily true: even if the swap starts with zero value and zero current exposure, future interest rate and exchange rate changes can create **positive expected exposure** over time. Flat term structures and equal coupons do not guarantee that the expected credit exposure profile remains zero throughout the life of the swap.
Author: Manit Arora
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Q-1.5. With respect to currency swaps, EACH of the following is TRUE except:
A
Unlike a vanilla interest rate swap, principal is exchanged at the beginning of a currency or cross-currency swap
B
Compared to an interest rate swap with identical remaining maturity, a currency swap will have higher potential credit exposure
C
If the initial value and current exposure of a currency swap is zero; interest rate term structures are flat in both currencies; coupon payments are equal, then the expected credit exposure profile is zero over the life of the swap
D
Unlike most vanilla interest rate swaps, interest payments in a currency swap are NOT netted
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