Question

Would you classify the exotic swap as hedging or speculation? Justify your answer.

Answer 1

Exotic swaps are those which have features different from commonly traded swaps. Exotic swaps include delayed start swap, indexed principal swaps and collapsible swap. These swaps are tailor made to suit the risk profiles of their clients. Most firms enter into an exotic swap to hedge their existing risk and these products are designed accordingly. Exotic swaps are highly illiquid and non standardized products. As trading volumes are very low these products cannot be classified as speculation. These are tailor made products to suit the risk profile of firms and used to hedge some kind of risk.