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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
Statement **C** is false. Even if: - the initial value is zero, - current exposure is zero, - curves are flat, and - coupon payments are equal, future exposure is not necessarily zero because the value of a currency swap can change with movements in exchange rates and interest rates. The other statements are true: - principal is exchanged in a currency swap, - currency swaps generally have more credit exposure than plain-vanilla interest rate swaps, - and interest payments are typically not netted across currencies.
Author: Manit Arora
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Question 1.5. Currency swaps: which statement is false?
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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