Question

Which of the following is TRUE?

1) Interest rate swaps can be viewed as a portfolio of forward contracts.​

2) A swap involving two floating rates is called a basis swap.​

3) Interest rate swap volume is greater than currency swap volume because virtually ever business is exposed to interest rate risk.​

A. 1,2 and 3 B. 1 and 2 C. 1 and 3 D. 2 and 3 E. just 1 F. just 2 G. just 3 H. None of the above

Answer 1

Answer is A. 1,2 and 3.

All 3 statements are true.

1) interest rate swaps are a chain of multiple forward contracts which are settled periodically by exchanging payments based on future interest rates on a principal amount. period of exchange of payments can be monthly, quarterly, half-yearly or yearly.

2) basic plain vanilla swap involves fixed and floating interest rates. a basis swap involves two different floating rates like LIBOR and U.S treasury bill rate.

3) mostly every business at some point of time uses debt to fund its business and debt brings with it the interest rate risk. so, most of the businesses will use interest rate swaps to hedge their interest rate risk. but only those businesses will use currency swap who has foreign currency exposure or do business internationally.

hence Interest rate swap volume is greater than currency swap volume.