In Comparing a Swap to a Futures or Forward Contract

question 1

Multiple Choice

In comparing a swap to a futures or forward contract where the underlying is an interest rate instrument such as a Eurodollar CD, which of the below statements is FALSE?

• A) The long futures position gains if interest rates decline and loses if interest rates rise - this is similar to the risk/return profile for a floating-rate payer.
• B) The risk/return profile for a fixed-rate payer is similar to that of the short futures position: a gain if interest rates increase and a loss if interest rates decrease.
• C) Interest rate swaps can be viewed as a package of more basic interest rate control tools, such as forwards.
• D) The pricing of an interest rate swap will then depend on the price of a package of forward contracts with the same settlement dates and in which the underlying for the forward contract is the same contract rate.

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Definitions:

Autonomy

The capacity to make an informed, uncoerced decision independently. In personal context, it refers to self-governance or the right to self-direct one's life.

Internal Motivation

The drive to act or behave in a certain way based on internal rewards or personal satisfaction rather than external pressures or rewards.

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