A Swap Is a Method Used to Reduce Financial Risk

question 5

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

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Definitions:

Market Value

The present rate at which a service or asset is available for purchase or sale in the marketplace.

Capitalized Interest

Interest expenditures included in the cost of a self-constructed asset

Construction Loans

Short-term loans provided to finance the building or renovation of a property, typically converted into a long-term loan after the construction is completed.

Labor and Material

Refers to the total cost of the work force (labor) and the materials used in the production of goods or the provision of services.