Question

Which one of the following statements about swaps is correct?

Select one:

a. Comparative advantages in debt markets lead to possibility of an interest rate swap

b. Only settlement risk is evident in swap contracts since clearing houses use marking-to-market approach to eliminate the credit risk

c. A swap is a theoretical concept because efficient markets eliminate all possibilities of arbitrage

d. Vanilla swap assumes a swap of a series of two floating interest rate payments

Answer 1

Option (A) is correct as the comparative advantage in debt markets leads to a possibility of interest rate swaps which involves with swapping the fixed interest rate with the floating interest rates.

Statement (B) is false as interest rates risks are very high in swap agreement and it's not just about settlement Risk.

Swaps are not just theoretical concept as it has high practical implications so statement (C) is also false.

Vanilla swaps stand for exchanging fixed rates swaps with floating rates so Statement (D) is also false.

So only correct Statement is statement (A).