You are the debt manager for a U.S.-based multinational.You need to borrow €100,000,000 for five years.You can either borrow the €100,000,000 directly in Germany or borrow dollars in the U.S.and enter into a combined interest rate and currency swap with a swap bank.One risk that you face by using the swap that you do not face by borrowing euros directly is
A)exchange rate risk.
B)sovereign risk.
C)credit risk.
D)interest rate risk.

Question

Quizplus · Accepted Answer

By using a swap, you introduce credit risk related to the counterparty in the swap agreement. This risk is not present when borrowing directly in euros, as there is no intermediary whose creditworthiness affects the transaction.

You Are the Debt Manager for a U