Credit risk exposure with interest and currency swaps

The increased use of financial derivatives like interest rate and currency swap contracts has drawn much attention, as it exposes banks to non-performance by their counterparts. This credit risk exposure is of great concern to monetary authorities, e.g. the Bank for International Settlements. In this paper a method for the determination of credit risk exposure is developed, in which the exposure is a function of interest rates, exchange rates, and lives of the contracts. To quantify the credit risk exposure, simulations of the variables have been used.