Ace’s issuer client has swapped its outstanding fixed-rate debt to floating to match asset portfolio cash flows that generate an MRR-based return. Which of the following statements best describes how Ace’s MTM credit exposure to the issuer changes if interest rates rise immediately following trade inception?
- Since the client receives fixed and pays floating swap, it faces an MTM loss on the transaction as rates rise, increasing Ace’s MTM exposure to the client.
- Since the client receives fixed and pays floating swap, it faces an MTM gain on the transaction as rates rise, decreasing Ace’s MTM exposure to the client.
- Since the swap’s value is equal to the current settlement plus future expected settlement amounts, we do not have enough information to determine whether Ace’s MTM exposure to the client increases or decreases.
Here the correct answer is 1, but since the client have swapped its outstanding fixed-rate debt to floating, shouldn’t it receive floating and pay fixed (different from what is mentioned in answer)
Yes answer is option A
As alredy mentioned that ki fixed rate debt to floatoing hai so interest rate increase hone se usse lose hoga
Here client is a issuer who have a liability to pay fixed interest on his outstanding debt and he has a asset portfolio which gives him MMR return so to match his assets liability he enter into a swap to receive FIXED & PAY FLOATING after he Enter into swap MMR rise because he is payer of MMR so he suffer loss