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Old 10-02-2016, 04:10 PM
financ financ is offline
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Exclamation Credit Risk questions

Dear Forum members i seek your help in the hour of need. I am in a case competition closing tonight and credit risk is not my forte. Any help in the below questions would be greatly appreciated:



Steel Inc is a manufacturer based in USA and expected the delivery of equipment from the UK. To hedge its long currency exposure, it entered into a 1 year currency forward contract at a rate of $1.76 for each British Pound to be received at expiration covering 1 million British Pounds. The US risk free rate is 5.12 % and the UK risk free rate is 6.23%, both compounded annually.
1) Suppose 6 months have passed since the initiation of the forward contract. Interest rates have remaining the same, but the spot rate is now $1.73. From the Desk’s (of a counter party risk analyst) perspective, what is the current risk exposure associated with the forward contract position facing Steel Inc.?
2) Would Marking to Market the forward contract reduce the credit exposure of the desk?
3) Consider instead that this forward contract is a fully-collateralized trade with a standing 10-day margin period of risk, where the value of the forward contract and the collateral offset to zero. Please explain why the Desk is still exposed to credit risk.
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Old 10-29-2016, 10:36 PM
mmrseobd mmrseobd is offline
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Default Re: Credit Risk questions

Need opinion from expert in the sector.
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