A Currency Swap Has More Counterparty Risk Than an Interest-Rate

question 23

Multiple Choice

A currency swap has more counterparty risk than an interest-rate swap because

• A)Unlike an interest rate swap,the counterparties are usually in different countries,making the swap vulnerable to different legal systems.
• B)Unlike an interest rate swap,the currency swap also involves an exchange and re-exchange of principal amounts,making the swap vulnerable to movements in exchange rates.
• C)Foreign exchange markets have more credit risk than interest rate markets.
• D)Each counterparty is less likely to default in its home currency than in a foreign currency.

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Definitions:

Faithful Representation

A qualitative characteristic of financial information that ensures all figures are complete, neutral, and free from material error.

Neutral

A term often used in analysis or discussions to indicate a position or opinion that is unbiased or not leaning towards any particular side or outcome.

Error

A mistake in the collection, recording, or analysis of data, often leading to incorrect results or conclusions.

Canadian GAAP

Generally Accepted Accounting Principles in Canada, a set of accounting standards and practices used in Canada to govern financial reporting.