Question

Discuss the risks confronting an interest rate and currency swap dealer in international market. Please wtite with your own words.

Answer 1

There are various type of risk that can be confront by a interest rate and currency swap dealer, some of the risk are as follows -

1) Interest rate Risk - It refers to the risk that there can be a change in interest rate unfavouably for the dealer at the time of finding the counterparty for the swap. When a dealer enters a swap, it also finds the another counterparty to mitigate the risk of swap and he caharges the commision from both the party for the swap. There can be a time gap between searching the Party and counterparty. At that time there is a risk that Interest rate can change unfavourably for the dealer.

2)Exchange Rate Risk - It is the risk that exchange rate may change unfavourably against the dealer during the swap period.

3) Credit Risk - There is another risk called credit risk. It is a risk that one of the party may default the obligation of the swap enter with the counterparty. If there is the default the dealer will have to bear the loss of such default.

4) Mismatch Risk - It is very difficulat to find out the exact match of the swap entered and hence there can be a mismatch. i.e say a dealer has lots of floating rate swap and he is not having enough fixed rate swap to counterpart the floating rate swap.

There are some other type of risk such as Soveregin risk, Basis risk that a a dealer faces in international market.