Question

Say we are in a country that does not permit corporations to have on balance-sheet exposure to equity market risk, so the company cannot, for example, take positions in equities or equity indices outright. How might a CFO of a company still take on such risks?

	A.	Enter into an equity swap to pay the equity index return and receive Libor.
	B.	Enter into an equity swap to receive the equity index return and pay Libor.
	C.	Both (a) and (b).
	D.	Neither (a) nor (b).

Answer 1

Since the country regulations does not allow to take positions in equities/equity indices the corporation may enter into Off-Balance Sheet arrangements that effect the assets/liabilities but do not appear on the balance sheet like sale of receivables, factoring arangements, guarentees of letters of credits, joint ventures, setting up special purpose vehicles, interest rate swaps and so on.
Depending on the exposure and the risk the company is willing to take, it may enter into a swap arrangement where it may pay/receive equity index return and receive/pay LIBOR(London inter bank operational rate).
So, the answer would be OPTION C