Explain why a bank is subject to credit risk

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Explain why a bank is subject to credit risk when it enters into two offsetting swap contracts.

At the start of the swap, both contracts have a value of approximately zero. As time passes, it is likely that the swap values will change, so that one swap has a positive value to the bank and the other has a negative value to the bank. If the counterparty on the other side of the positive-value swap defaults, the bank still has to honor its contract with the other counterparty. It is liable to lose an amount equal to the positive value of the swap.

From above content, what does it mean by 'one swap has a positive value to the bank'

Reference no: EM132025250

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