Suppose that a financial institution has entered into a swap dependent on the sterling interest rate with
Question:
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 one 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 one year on both contracts is the sum of the 95% upper confidence limit for the exposure in one year on the contract with X and the 95% upper confidence limit for the exposure in one year on the contract with Y.
Explain your answers.
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