What is a critical characteristic of credit risk throughout the duration of a swap?

A critical characteristic of credit risk throughout the duration of a swap is that it varies with the financial condition of the involved parties. Credit risk, which refers to the possibility that one party in a financial transaction may default on its obligations, is not static. As the financial health and creditworthiness of the counterparties change over time—due to fluctuating economic conditions, changes in market perceptions, or alterations in the parties’ business operations—the likelihood of default also shifts accordingly.

This variation is significant because it directly influences the pricing, valuation, and overall risk assessment of the swap. If one party's financial condition weakens, the credit risk associated with that party increases, potentially leading to a need for increased collateral or adjustments in the swap's terms. Conversely, if a party becomes more financially stable, the credit risk associated with them may decrease. Thus, the dynamic nature of credit risk in relation to the ongoing financial condition of the parties involved is a fundamental aspect of managing swaps and similar derivative contracts.