A Swap Is a Method Used to Reduce Financial Risk

question 25

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 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) Swaps can involve side payments in order to get the counterparty to agree to the swap.

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Definitions:

Gross Profits

The difference between sales revenue and the cost of goods sold, before deducting operating expenses, interest, taxes, and other costs.

Excess Annual Amortization

Excess annual amortization refers to the amount by which yearly amortization expenses exceed the standard or expected levels, potentially impacting financial statements.

Intra-entity Gain

Profit resulting from transactions between divisions or units within the same company, not affecting the overall financial position of the company.

Accrual-based Net Income

The measure of a company's financial performance that includes earned revenues and incurred expenses that have yet to be received or paid.