Does put call parity hold when there is default risk

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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.

Reference no: EM131239654

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