ABC,a US-Based Corporation Enters into a Currency Basis Swap with XYZ,a

question 13

Multiple Choice

ABC,a US-based corporation enters into a currency basis swap with XYZ,a British company,in which the initial principal amounts are $200 million and $£$ 100 million.That is: -At inception,there is an initial principal exchange in which ABC pays XYZ $200 million and receives
-- $£$ --100 million.
-Subsequently,at each interest payment date ABC pays XYZ the GBP-Libor rate on
-- $£$ --100 million,and receives the USD-Libor rate on $200 million.
-Fnally,at maturity,a re-exchange of principals occurs in which ABC pays XYZ
-- $£$ -- 100 million in exchange for $200 million.
Suppose the spot exchange rate is $1.55 = $£$ 1 at the time of entering into the swap.Assume that ABC and XYZ both have AA credit ratings at this time and can access funds at Libor flat.Then,from a credit perspective,

• A)ABC is carrying more counterparty risk than XYZ.
• B)ABC is carrying less counterparty risk than XYZ.
• C)Both sides are carrying the same credit risk.
• D)Neither side is carrying any credit risk.

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