1215

Which of the following is an advantage of the swaps market over the futures markets? The:

A) credit risk of the contract.

B) liquidity of the contract.

C) ability to hedge over long time horizons.

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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.

1215

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.

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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.

1215

Swap contracts typically:

A) do not require a payment from either party at initiation.

B) cover a single payment.

C) are standardized contracts.

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Swaps typically do not require a payment from either party at initiation. The exception is currency swaps.

1215

Determine the transactions involved with a plain vanilla interest rate swap and whether or not notional principal is generally swapped:

Plain vanilla interest rate swap

Notional principal

A) pay fixed rate, pay fixed rate swapped

B) pay fixed rate, pay floating rate swapped

C) pay floating rate, pay fixed rate not swapped

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The most common type of interest rate swap is called a plain vanilla interest rate swap. It involves trading fixed interest rate payments for floating-rate payments. Notional principal is generally not swapped in single currency swaps.