LOS a, (Part 2): Explain how swaps are terminated.

Q1. All of the following are ways to exit a swap contract EXCEPT:

A)   entering an offsetting swap with the original counterparty.

B)   selling a swaption.

C)   making a cash payment to the original counterparty.

Q2. An offsetting swap is a swap that:

A)   reduces the credit risk of an earlier swap.

B)   is opposite to an existing swap in cash flows.

C)   reduces the principal amount of a swap.

Q3. The least likely way to terminate a swap agreement prior to expiration is to:

A)   sell the swap.

B)   make/receive a payment to/from the original counterparty.

C)   exercise a swaption.

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Q1. All of the following are ways to exit a swap contract EXCEPT:

A)   entering an offsetting swap with the original counterparty.

B)   selling a swaption.

C)   making a cash payment to the original counterparty.

 Correct answer is B)

Selling a swaption gives the seller an obligation to enter into a swap if the swaption is exercised. To exit a swap, the entity would want to buy the swaption.

Q2. An offsetting swap is a swap that:

A)   reduces the credit risk of an earlier swap.

B)   is opposite to an existing swap in cash flows.

C)   reduces the principal amount of a swap.

Correct answer is B)

An offsetting swap is a swap with opposite cash flows to an existing swap. It is one way to exit a swap position, just as an offsetting trade is used to close out a futures position.

Q3. The least likely way to terminate a swap agreement prior to expiration is to:

A)   sell the swap.

B)   make/receive a payment to/from the original counterparty.

C)   exercise a swaption.

Correct answer is A)

There is no functioning secondary market in swaps; selling a swap would be unusual and would require the permission of the counterparty.

CBB

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