What critical factor determines the credit risk in swaps and forwards?

The timing of market value assessments is a critical factor in determining credit risk in swaps and forwards because it reflects the point at which the market value of the derivative can fluctuate significantly. Credit risk arises when one party in a derivatives contract fails to meet its obligations, and this risk is closely linked to how and when valuations are assessed.

Frequent assessments of the current market values of swaps and forwards can provide early indicators of potential credit exposure. If one counterparty's financial condition changes negatively, the assessed market value of the swap or forward contract may reflect a liability for that party, increasing credit risk.

Assessing the market value at specific times – especially during volatile market conditions – can yield varying levels of perceived credit risk. Timely market value assessments allow parties to maintain awareness of their exposure and react accordingly, such as by using collateral agreements or adjusting margins.

While transaction volume, current market conditions, and historical relationships between counterparties may influence credit risk, the timing of those assessments directly impacts how and when that risk is calculated and managed. This makes it a fundamental factor in understanding credit risk in these financial instruments.