What Is Replacement Risk in the Swap Market

question 89

Multiple Choice

What is replacement risk in the swap market?

• A)The risk of substituting a defaulted swap with a new swap at less favorable terms.
• B)The cost incurred by the swap dealer in replacing the defaulting party on the same terms as the original swap.
• C)The risk involved in exchanging fixed interest payments for floating interest payments by two counterparties.
• D)The risk associated with long-term hedge sometimes for as long as 15 years.
• E)The comparative disadvantage faced by swap seller in making variable or floating rate payments.

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Definitions:

Dividend Policy

A company's strategy or policy outlining how often dividends will be paid out to shareholders and in what amount.

Reported Income

The income figure that a company officially reports to its shareholders and regulatory bodies, often after adjustments and before taxes.

Influencing Investee

An investment situation where the investor has significant influence over, but not control of, the financial and operating policies of another entity.

Available-for-sale Securities

Financial assets not classified as held-to-maturity or trading securities, which can be sold in response to liquidity needs or changes in interest rates.