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

A (the party paying fixed) is likely to bear the greater counterparty risk when interest rates are expected to rise over the life of the swap. This is because as interest rates rise, the fixed rate paid by A becomes less attractive relative to the floating rate paid by B. If B defaults on the payments, A may be left with a lower-than-market value fixed rate investment while still having to make payments at the higher fixed rate.

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