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5. Which of the following is true for the party paying fixed in an interest rate swap? Assume no other transactions with the counterparty. A. There is more credit risk when the yield curve is upward sloping than when it is downward sloping B. There is more credit risk when the yield curve is downward sloping than when it is upward sloping C. The credit exposure increases when interest rates decline D. There is no credit exposure providing a financial institution is used as the intermediary

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Answer:

The answer is option A, There is more credit risk when the yield curve is upward sloping than when it is downward sloping

Explanation:

Solution

In an interest swap rate, when we receive floating, and pay fixed, in upward sloping yield curve, we are going to receive increase of  cash flows and therefore going to pay fixed and so, the counterpart will be at  a loss in slopping upward yield curve, and hence, we will have a credit risk that will be greater.

The statement i.e. true with respect to the party paying fixed in interest rate swapping should be option A. There should be more credit risk at the time when the yield curve should be upward sloping.

Interest rate swapping:

In the case of rate of interest swapping, at the time of fixed payment and receiving the floating there should be upward sloping yield curve that resulted into increment of the cash flows also the counterparty should be at loss that resulted in the high credit risk.

Therefore, the correct option is A.

Learn more about yield here: https://brainly.com/question/224985

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