medium · FRM Part 1 Financial Markets and Products
A bank holds a large position in an OTC interest rate swap and is concerned about the risk that the counterparty defaults.
To mitigate this risk without terminating the swap, the bank could:
- Increase the notional of the swap to earn more interest.
- Enter into an offsetting swap with the same counterparty.
- Convert the swap into a European call option.
- Buy a Credit Default Swap (CDS) on the counterparty.
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