Understanding Market Risk in Swaps

In the context of derivative markets, understanding the various types of risks associated with these instruments is crucial for effective risk management. Derivative risks can arise from various sources, including market volatility, liquidity constraints, and counterparty failures. An investor holds a long position in a swap agreement where they pay a fixed rate of interest and receive a floating rate linked to the LIBOR rate. If the market experiences a significant increase in interest rates, which of the following risks is the investor primarily exposed to?