Problem
Suppose you just entered into a 5-year fixed-for-floating interest-rate swap with counterparty ABC. You are attempting to estimate the credit risk to ABC that you have taken on via this trade; For simplicity you decide to focus just on the chance that the counterparty may default exactly 2 years into the life of the swap. Can you explain how the volatility of interest rates over the next two years would be used to quantify the credit risk?