netting agreements, mark-to-market agreements, and off market swap contracts

Because currency swaps almost always include netting agreements and interest rate swaps can be structured to include mark-to-market agreements, we can significantly reduce the credit risk of these swap instruments by negotiating swap contracts that include these respective features. When negotiating these features is not possible, credit risk can be reduced by using off-market swaps that do not require an initial payment from your firm.


[Question]
Evaluate statements above regarding your firm's ability to mitigate the credit risk inherent in currency swaps and interest rate swaps. The statements above are only correct regarding:

A. netting agreements.
B. mark-to-market agreements.
C. off market swap contracts.

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Answer: B

netting agreements, mark-to-market agreements, and off market swap contracts

Time	interest rate swap	currency swap	equity swap
netting agreements.	OK	- (*)	OK
mark-to-market agreements.	OK	OK
off market swap contracts. (**)

(*) Currency swap payments are generally not netted.
(**) Using off-market swaps is not generally a method to reduce credit risk. If your firm enters into an off-market swap in which they do not owe a payment, then a payment is owed to your firm by the counterparty. This would actually increase credit risk since the counterparty could potentially default on the initial payment.