Question

26. What type of swap contract can an investor enter into to benefit from a future increase in rates?

1. Enter into a swap agreement to receive a fixed rate.
2. Enter into a swap agreement to receive a floating rate.
3. Enter into a swap agreement to pay a floating rate.
4. Enter into a forward contract starting swap to pay a floating rate.

Answer 1

Types of swap contract an investor can enter into to benefit from a future increase in rate enter into a swap agreement to receive a fixed rate.

Therefore correct answer is option A. Enter into a swap agreement to receive a fixed rate.

Swaps are derivatives markets products used for the managing the financial risk. It is an agreement between two parties to exchange cash flows on a pre-determined future date. In swap agreement generally one party pays fixed rate and another party pays a floating rate. If an investor thinks that there will be an increase in future prices then they prefer to receive a fixed rate because floating rates can increase their costs. Therefore investor will enter into a swap agreement to receive a fixed rate so that they can benefit from a future increase in rates by saving the cost.