Explanation:
With the exception of off-market swaps, all other swaps have an initial market value of zero to both counterparties. As a result, neither X nor Y has credit exposure to the other at inception. For example, if bank X immediately defaults, Y would lose nothing.
Things to Remember
Ultimate access to all questions.
No comments yet.
Q.1943 Two banks - X and Y - enter into an interest rate swap, where bank X pays a floating rate and Y the fixed rate, based on a notional value of $50 million. Assume the swap has a term of 5 years.
Which of the following would most likely be true at the time of inception of the swap?
A
The market value would be $50 million to both X and Y.
B
The market value would be zero to both X and Y.
C
X would have a market value of zero while Y would have a market value of $50 million with respect to the swap.
D
Y would have a market value of zero while X would have a market value of $50 million with respect to the swap.