 Interest rate structure and the credit risk of swapsKaterina Simons New England Economic Review, 1993, issue Jul, 23-34 Abstract: Swap contracts have grown tremendously in the last decade. Most are interest-rate swaps, the simplest being an exchange of one partys fixed-rate interest payments for anothers floating-rate payments. Swaps can lower borrowing costs for both parties as well as provide a tool for managing interest-rate risk. As the market for swaps grows and matures, understanding and measuring the accompanying credit risk remains a concern of bankers, regulators, and corporate users ; The credit risk of swaps arises when one party defaults and interest rates have changed in such a way that the other party can arrange a new swap only on inferior terms. It involves only the cash flows exchanged by the counterparties, and not the underlying notional principal. Previous work has used simulations of the future course of interest rates to analyze swaps credit risk. This study adds the interest rate forecast implicit in the yield curve to the randomly generated interest-rate scenario used in the simulations. The author shows that credit exposure is greater for longer maturities and when future rates are expected to be higher, and that the risk rises and then falls over the life of the swap. Keywords: Interest rates; Swaps (Finance) (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbne:y:1993:i:jul:p:23-34 Ordering information: This journal article can be ordered from Access Statistics for this article More articles in New England Economic Review from Federal Reserve Bank of Boston Contact information at EDIRC. |
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