A Swap Is a Method Used to Reduce Financial Risk

question 3

Multiple Choice

A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?

• A) A swap involves the exchange of cash payment obligations.
• B) The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
• C) Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
• D) A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
• E) A company can swap fixed interest payments for floating interest payments.

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Definitions:

Nominal Scale

A classification system that categorizes data into discrete categories without any numeric or ordered value.

Central Tendency

A statistical measure that identifies a single value as representative of a data set, like the mean, median, or mode.

Measure

A tool or method used to quantify the characteristics or properties of subjects under investigation.

Mean

The average value of a set of numbers, calculated by adding all the numbers and dividing by the count of those numbers.