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A bank enters into an interest rate swap with a nonfinancial counterparty using bilaterally clearing where it is paying a fixed rate of 3% and
A bank enters into an interest rate swap with a nonfinancial counterparty using bilaterally
clearing where it is paying a fixed rate of 3% and receiving LIBOR. No collateral is
posted and no other transactions are outstanding between the bank and the counterparty.
What credit risk is the bank subject to? Discuss whether the credit risk is greater when the
yield curve is upward sloping or when it is downward sloping.
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