honeycfa

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

A) ability to hedge over long time horizons.

B) credit risk of the contract.

C) liquidity of the contract.

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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.

honeycfa

Which of the following is NOT a likely motivation today for entering into a swap agreement?

A) Maintain privacy.

B) Exploit perceived market inefficiencies.

C) Avoid costly regulation.

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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.

honeycfa

The motivation for swap agreements would be:

A) guaranteed performance on the contracts for all parties.

B) the reduction of business risk.

C) the reduction of transactions costs.

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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.

honeycfa

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.

honeycfa

Swap contracts typically:

A) cover a single payment.

B) are standardized contracts.

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

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

honeycfa

Which of the following statements about swaps is least accurate?

A) Swaps are illiquid.

B) Parties to swap contracts are often individual speculators.

C) Swaps typically have zero value at initiation.

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Parties to swaps contracts are usually large institutions, rarely individual speculators or hedgers.