Which of the Following Statements Is Correct

question 561

Multiple Choice

Which of the following statements is correct?

• A) Hedging a long bond position with payer's swap involves basis risk
• B) Hedging the credit risk of an asset swap package with a credit default swap has no basis risk
• C) Basis risk is a result only of maturity mismatches
• D) Basis risk is a result only of duration mismatches.

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Definitions:

Constant of Proportionality

The fixed value that relates two proportional quantities.

Directly Proportional

A relationship between two variables wherein they increase or decrease at the same ratio.

Fifth Power

Raising a number or expression to the exponent of five, multiplying it by itself four times.

Hooke's Law

A principle of physics that states the force needed to extend or compress a spring by some distance is proportional to that distance.