Suppose that a financial institution has entered into a swap dependent on the sterling interest rate with counterparty X and an exactly offsetting swap with counterparty Y. Which of the following statements are true and which are false:

(a) The total present value of the cost of defaults is the sum of the present value of the cost of defaults on the contract with X plus the present value of the cost of defaults on the contract with Y.

(b) The expected exposure in 1 year on both contracts is the sum of the expected exposure on the contract with X and the expected exposure on the contract with Y.

(c) The 95% upper confidence limit for the exposure in 1 year on both contracts is the sum of the 95% upper confidence limit for the exposure in 1 year on the contract with X and the 95% upper confidence limit for the exposure in 1 year on the contract with Y. Explain your answers.AppendixLO1