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

question 25

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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Definitions:

Inputs

Resources, materials, or information that are provided to a process or system in order to achieve desired outputs or outcomes.

Expectancy Theory

A motivation theory explaining that an individual's motivational force is a function of their expectation that certain behaviors will lead to desired outcomes.

Internal Attribution

The process of attributing the cause of one's own or others' behavior to internal, personal characteristics rather than to external factors.

External Attribution

The process of attributing the cause of one's own or others' behavior to external factors or the situation, rather than to internal characteristics.