1. ‘‘A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.'' Explain this statement.
2. Explain why the credit exposure on a matched pair of forward contracts resembles a straddle.
3. Explain why the impact of credit risk on a matched pair of interest rate swaps tends to be less than that on a matched pair of currency swaps.
4. ‘‘When a bank is negotiating currency swaps, it should try to ensure that it is receiving the lower interest rate currency from a company with a low credit risk.'' Explain why.
5. Does put-call parity hold when there is default risk? Explain your answer.