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“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are...

“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are the companies that are most likely to be paying fixed and receiving floating in an interest rate swap.” Assume that this statement is true. Do you think it increases or decreases the risk of a financial institution’s swap portfolio? Assume that companies are most likely to default when interest rates are high.

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Assuming that companies are most likely to default when interest rates are high we can say that the risk of a financial institution’s swap portfolio will decrease. It should be noted that there is a time lag between interest rates being high and the default that takes place as a result of this high interest rates. So in reality when the default does actually happen the interest rates may be relatively low.

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