have fallen, he will pay the cancellation fee, and vice-versa if rates have risen.       CREDIT RISK   The rate quoted for swaps in the interbank market assumes that the coun- terparty to the transaction has a lending line with the swap bank, so the swap rate therefore reflects the credit risk associated with interbank qual- ity counterparty. This credit risk is reflected in the spread between the swap rate and the equivalent-maturity government bond, although, as noted, the spread also reflects other considerations such as liquidity and supply and demand. The credit risk of a swap is separate from its interest- rate risk or market risk, and arises from the possibility of the counter- party to the swap defaulting on its obligations. If the present value of the swap at the time of default is net positive, then a bank is at risk of loss of this amount. While market risk can be hedged, it is more problematic to hedge credit risk. The common measures taken include limits on lending lines, collateral, and diversification across counterparty sectors, as well as a form of credit value-at-risk to monitor credit exposures. A bank therefore is at risk of loss due to counterparty default for all its swap transactions. If at the time of default, the net present value of the swap is positive, this amount is potentially at risk and will probably be written off. If the value of the swap is negative at the time of default, in     theory this amount is a potential gain to the bank, although in practice the counterpartys administrators will try to recover the value for their cli- ent. In this case then, there is no net gain or loss to the swap bank. The credit risk management department of a bank will therefore often assess the ongoing credit quality of counterparties with whom the swap transac- tions are currently positive in value.       CROSS-CURRENCY SWAPS   So far we have discussed swap contracts where the interest payments are both in the same currency. A cross-currency swap is similar to an interest- rate swap, except that the currencies of the two legs are different. Like interest-rate swaps, the legs are usually fixed- and floating-rate, although again it is common to come across both fixed-rate or both floating-rate legs in a currency swap. On maturity of the swap, there is an exchange of principals, and usually (but not always) there is an exchange of principals at the start of the swap. Where currencies are exchanged at the start of the swap, at the prevailing spot exchange rate for the two currencies, the