Explain carefully how swaps allow firms and banks to separate different types of fixed income risk. What kind of firm would especially like to separate these two risks? What type of risk is this kind of firm likely to want to retain?

Explain carefully how swaps allow firms and banks to separate different types of fixed income risk. What kind of firm would especially like to separate these two risks? What type of risk is this kind of firm likely to want to retain?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter10: Measuring Exposure To Exchange Rate Fluctuations

Section: Chapter Questions

Problem 1ST

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Concept explainers

Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.

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