Who is likely to bear the greater counterparty risk in a swap where A pays fixed and B pays floating if interest rates are expected to rise over the life of the swap?
A)a.
B)b.
C)Both A and B.
D)There is not enough information to determine the correct answer.

Question

Quizplus · Accepted Answer

When interest rates are expected to rise over the life of the swap,the fixed-rate payer makes greater payments than the floating-rate payer in the early life of the swap.Therefore,the fixed-rate payer (A)bears the risk that the floating-rate payer may default before swap maturity,thereby not receiving payments in the second half of the swap's life when the floating rate payments are likely to be higher than the fixed rate payments.

Who Is Likely to Bear the Greater Counterparty Risk in a Swap