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

question 21

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:

Promissory Note

A Promissory Note is a financial instrument that contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.

Simple Interest

Interest calculated only on the principal amount, not on previous interest earned.

Discounted

Refers to the reduction of an item's price or the present value calculations of future cash flows using a discount rate.

Promissory Note

A financial instrument containing a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.