Answered: In a conventional interest rate swap…

In a conventional interest rate swap agreement,the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities true or false

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 11QTD

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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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In a conventional interest rate swap agreement,the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities

true or false

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Why might a company become involved in an interestrate swap contract to receive fixed interest payments andpay variable?
The following statements relate to derivatives. Which of the following is FALSE?a. Swaps may have cashflows as its underlying assets.b. Options allow the buying party to pay a price for a chance to buy or sell the underlying asset .c. Futures are forward commitments.d. Futures and forwards may be contingent claims wherein the contract can be cancelled upon the agreement of both parties.
What types of risks are interest rate andexchange rate swaps designed to mitigate?Why might one company prefer fixed-rate payments while another company prefers floating-ratepayments, or payments in one currency versusanother?
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A standard “fixed for floating” interest rate swap contract is effectively a series of call options on the interest rate put options on the interest rate. forward rate agreements. none of the above
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In hedging, interest rate swap (IRS) can be used to hedge against rising rates, falling rates, manage asset-liability durationgaps, protecting revenue and lock-in cost of borrowing.