As a significant player in the oil and gas industry, GasCo may take account a gas swap contract calling for the exchange of 1 m3 of gas at the end of each year for a period of 3 years. In this case, the discount factors for maturities of 1, 2 and 3 years are 0.98, 0.94 and 0.89. In most cases, gas storage requires additional costs; the proportional storage costs equal 3% per year with annual compounding. Meanwhile, there will be no convenience yield on gas, and the current spot price takes place at $3 per m3. In this case, which party in the swap transaction is more exposed to credit risk over the life of the swap, a seller or a buyer? Briefly explain your answer.
As a significant player in the oil and gas industry, GasCo may take account a gas swap contract calling for the exchange of 1 m3 of gas at the end of each year for a period of 3 years. In this case, the discount factors for maturities of 1, 2 and 3 years are 0.98, 0.94 and 0.89. In most cases, gas storage requires additional costs; the proportional storage costs equal 3% per year with annual compounding. Meanwhile, there will be no convenience yield on gas, and the current spot price takes place at $3 per m3.
In this case, which party in the swap transaction is more exposed to credit risk over the life of the swap, a seller or a buyer? Briefly explain your answer.
A swap is a financial arrangement under derivative contract criteria , in such arrangement two parties exchange their liabilities linked to an asset or instrument
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