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Compare the difference between default risk of interest swap and default risk of currency swap. Which...

Compare the difference between default risk of interest swap and default risk of currency swap. Which one is larger? Justify your answer.

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Answer #1

Interest swap risk: this have 2 major risks 1. Interest rate risk 2. Counterparty risk or default risk

Interest rate risk is when interest rates doesn't move as expected which generally do not. So this is insignificant risk.

Counterparty risk : where the other party to the contract will be unable to meet its due obligations.

Default risk of currency swap: when the party to the contract fails to meet its obligations.

The currency swap default risk is larger because it involves fx rates movements which are greater than interest rate movements and much volatile.

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