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

Interest Rate Swap: A financial derivative contract where two parties agree to exchange interest rate cash flows, based on a notional principal amount, over a specified period of time.
Floating Rate: An interest rate that is allowed to move up and down with the market or along with an index.
Fixed Rate: An interest rate that remains constant throughout the life of the financial instrument.
Notional Value: The nominal or face value of a financial instrument on which interest rate payments are calculated.
Credit Exposure: The potential financial loss that a party to a financial contract may suffer if the counterparty defaults.

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?

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The market value would be $50 million to both X and Y.

The market value would be zero to both X and Y.

X would have a market value of zero while Y would have a market value of $50 million with respect to the swap.

Y would have a market value of zero while X would have a market value of $50 million with respect to the swap.

Financial Risk Manager Part 2

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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?

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Financial Risk Manager Part 2

Get started today

Get started today

Comments (0)

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?

Comments (0)

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?