Irvingy!!!!!!!!!!!!!!!how in the case of SWAP?

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traders asked me one question as follow, could you so kind have a look on it?

if a bank enters into a pay swap, ( pay fixed interest rate), so does the risky asset of bank increase or not? and how much?

risky asset :  according Bassel two

 for example: loan 1Million, with r=10%

 but the loan may be default, so the risky asset of bank increases by 1 Million, once it issue the loan

but how in the case of SWAP?

MANY THANKS

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关键词：Irvingy irving Irvin Case swap Irvingy

看Basel II

这里有个例子，http://www.bis.org/publ/bcbs116.pdf，17页

[此贴子已经被作者于2008-6-3 8:04:18编辑过]

谢谢。

Sounds interesting! interview question?

Does IR Swap exchange principle? I am neither a trader nor a quant, just want to place my thought (which does not mean much).

The exposure of fixed payer is decreases in IR.

The risk of a loan is increases in IR.

Am I right? not sure! It seems the risks of placing a loan can be hedged by entering IR swap.

Again, does IR Swap exchange principle? if so,  I would say IR swap should not affect the default risk of the loan.

Comments?

Could anybody let me know what "Bassel two" is? Is that a kind of certificate? appreciate!

Basel II is the new capital accord which the bank should follow. It has been published in June, 2006. Some banks in China are trying to put it into practice. Basically, Basel II is a requirement towards risk management in banks. More information, you should google it.

I think that the credit risk,which is the default risk of the counterparty if it incurred a loss in this swap, should be included in the computation of risk weighted assets under the framework of Basel II. The net expected earning of the bank is the quantity of the credit risk that counts, but I'm not sure if the market risk should be included in.