Question

31. Which of the following is NOT an advantage of having an interest rate swap market? A. As it is generally liquid, it benefits both borrowers and lenders. B. As most swaps involve banks, their credit departments can carry out credit assessments more easily than potential lenders. C. As the banks are involved in most swaps, banks require a spread between the two interest rates. D. Swaps enable companies to carry out regulatory and tax arbitrage.

why c is not correct??

Answer 1

C. As the banks are involved in most swaps, banks require a spread between the two interest rates.
A interest rate swap is an contractual agreement to exchange fixed payments for floating payments linked to an interest rate and vice versa. Banks are involved with bulk of fixed and floating interest rate exposure they typically cancel each other out but any interest rate risk can be offset by interest rate swaps but actual interest rate do not always match the expectation so interest rate swaps involve interest rate risk.