Evaluating Credit Risk

Current credit risk: associated with payments currently due

Potential credit risk: associated with future payments

Cross-default provisions: a debtor is considered default of all obligations if it defaults on any one of them

Credit risk is the PV of the future payment

The PV of the value of forward is the cashflow discounted the appropriate interest rate. Important is to assume the spot price being unchanged until settlement.

Interest rate swap credit risk is the highest in the middle.

Currency swap is the highest between the middle and the maturity (due to exchange of principals)

Options: Only the long bearing risks

American is riskier than European