Counterparty credit risk is a source of great concern for end users and dealers in the swaps market (market for swaps/ swap agreements). This risk arises from possible default by a swap counterparty when the swap is in the money, i.e., it has a positive value. The credit exposure in a swap is typically measured by the current replacement cost, which is the amount required to replace the swap upon the occurrence of a counterparty’s default. In this sense, credit exposure represents the reduction in the present value of the net cash flows generated by the swap if it was replaced at current market terms for the remaining life of the defaulting swap, provided that the agreement is subject to enforceable netting.
Derivatives
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