For a given notional amount, which of the following carries the greatest counterparty exposure (assuming the same counterparty credit rating for each):

For a given notional amount, which of the following carries the greatest counterparty exposure (assuming the same counterparty credit rating for each):
A . A futures contract on an equity index
B . A one year certificate of deposit
C . A one year forward foreign exchange contract
D . A one year interest rate swap

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Answer: B

Explanation:

The exposure at default is the greatest for the certificate of deposit as the entire notional amount is exposed to the risk of default. The other choices represent derivatives for which the current replacement value, which would be far less than notional, would be the credit exposure.

Said another way – if the counterparty were to default, the entire money in the CD would be at risk, whereas for the derivative contracts it would only be the replacement value that would be at risk.