Suppose an individual buys a correlation swap with a fixed correlation of 0.2 and a notional value of $1 million for one year. The realized pairwise correlations of the daily log returns at maturity for three assets are 2,1 = 0.7, 3,1 = 0.2, and 3,2 = 0.3. What is the correlation swap buyer's payoff at maturity?

1. $100.000.
2. $200,000.
3. $300,000.
4. $400,000.

The relationship of correlation risk to credit risk is an important area of concern for risk managers. Which of the fallowing statements regarding default probabilities and default correlations is incorrect?

1. Creditors benefit by diversifying exposure across industries to lower the default correlations of debtors.
2. The default term structure increases with time to maturity for most investment grade bonds.
3. The probability of default is higher in the long-term time horizon fur non-investment grade bonds.
4. Changes in the concentration ratio could change credit risk.