Credit Risk Exposure with Currency Swaps

Robert Christophor Coppes

European Financial Management, 1997, vol. 3, issue 1, 85-97

Abstract: Most countries have adopted the proposals of the Bank for International Settlements (BIS) to cover credit risks incurred by banks and security institutions. For derivatives the exposed amount has been defined as the positive marked‐to‐market value plus an add‐on factor. For currency swaps there are three add‐on factors, depending on the remaining life of the contract. In this paper it is shown that they should also depend on interest differentials, the interest rate and exchange rate volatilities, and the interest correlation. Further, it is shown that credit risk is not always divided equally over both parties.

Date: 1997
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