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Q6. Which of the following is an advantage of the swaps market over the futures markets? The:
A) credit risk of the contract.
B) ability to hedge over long time horizons.
C) liquidity of the contract.
Q7. Which of the following is NOT a likely motivation today for entering into a swap agreement?
A) Maintain privacy.
B) Avoid costly regulation.
C) Exploit perceived market inefficiencies.
Q8. The motivation for swap agreements would be:
A) the reduction of transactions costs.
B) guaranteed performance on the contracts for all parties.
C) the reduction of business risk.
Q9. Which of the following choices is generally NOT part of a plain-vanilla swap transaction?
A) Exchange of notional amount.
B) Tenor.
C) Swap facilitator.
Q10. Which of the following characteristics about swaps is least accurate? Swaps:
A) have no active secondary market.
B) are custom instruments.
C) are highly regulated.
Q11. Which of the following regarding a plain vanilla interest rate swap is most accurate?
A) Only the net interest payments are made.
B) The notional principal is swapped.
C) The notional principal is returned at the end of the swap.
Q6. Which of the following is an advantage of the swaps market over the futures markets? The: fficeffice" />
A) credit risk of the contract.
B) ability to hedge over long time horizons.
C) liquidity of the contract.
Correct answer is B)
The futures market uses a standardized contract, which increases the liquidity of the contract. Also, futures exchanges assume the credit risk. However, as the time horizon increases, the liquidity of futures contracts decreases substantially. Therefore, swaps are considered a better method of hedging over long time horizons.
Q7. Which of the following is NOT a likely motivation today for entering into a swap agreement?
A) Maintain privacy.
B) Avoid costly regulation.
C) Exploit perceived market inefficiencies.
Correct answer is C)
During the 1980s, some parties entered the swap market in an effort to exploit perceived market inefficiencies. Today, the uses of the swaps market are not motivated by perceived informational inefficiencies.
Q8. The motivation for swap agreements would be:
A) the reduction of transactions costs.
B) guaranteed performance on the contracts for all parties.
C) the reduction of business risk.
Correct answer is A)
Historically, there were two basic motivations for swaps: to exploit perceived market inefficiencies and to attempt to obtain cheaper financing. Both of these motivations are based on the concept that the financial markets are inefficient. This fact, unfortunately, is no longer true. Today, the swap markets are mature and offer few arbitrage opportunities. Swap markets are now viewed as being more operationally efficient and a more flexible means of packaging and transforming cash flows than any other method. The reasons given now for using the swap markets are to: reduce transactions costs, avoid costly regulations, and maintain privacy.
Q9. Which of the following choices is generally NOT part of a plain-vanilla swap transaction?
A) Exchange of notional amount.
B) Tenor.
C) Swap facilitator.
Correct answer is A)
Since the notional principal swapped is the same (and in the same currency) for both counterparties, there is no need to actually exchange cash. The counterparties are the pay-fixed and receive-fixed sides. A swap facilitator helps to bring the counterparties together and may be either an agent or a broker. The tenor of the swap is the time frame covered by the deal, or the time to maturity of the swap.
Q10. Which of the following characteristics about swaps is least accurate? Swaps:
A) have no active secondary market.
B) are custom instruments.
C) are highly regulated.
Correct answer is C)
Swap contracts are largely unregulated.
Q11. Which of the following regarding a plain vanilla interest rate swap is most accurate?
A) Only the net interest payments are made.
B) The notional principal is swapped.
C) The notional principal is returned at the end of the swap.
Correct answer is A)
The plain vanilla interest rate swap involves trading fixed interest rate payments for floating rate payments. Swaps are a zero sum game, what one party gains the other party loses. In interest rate swaps, only the net interest rate payments actually take place because the notional principal swapped is the same for both counterparties and in the same currency units, there is no need to actually exchange the cash.
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