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Credit Exposure Scenario

fullofquestions

New Member
I am not sure this is the question in its entirety... I think I have the answer although it would be good to double check.

You have a 5 year FX contract where you buy CAD and sell GBP. Calculate and determine the worst case scenario:
a. counterparty defaults in 1 yr & CAD depreciates to its lowest possible level (GBP stays constant)
b. counterparty defaults in 3 yr & CAD depreciates to its lowest possible level (GBP stays constant)
c. counterparty defaults in 1 yr & GBP depreciates to its lowest possible level (CAD stays constant)
d. counterparty defaults in 3 yr & GBP depreciates to its lowest possible level (CAD stays constant)


Buy low, sell high is the name of the game. So the answer should be c or d. The absolute amount lost in c is the same as that lost in d so with time value of money factored in, I believe c is the best answer. Just checking.
 
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