When the Normal Relationship Between Fixed and Floating Interest Rates

question 7

Multiple Choice

When the normal relationship between fixed and floating interest rates alters in an interest rate swap,this risk is called:

• A) basis risk.
• B) exchange risk.
• C) mismatch risk.
• D) front-end risk.

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Definitions:

Rent-seeking Behavior

Activities undertaken by individuals or firms to increase their own wealth without creating new wealth, often through manipulating the social or political environment in which economic activities occur.

X-inefficiency

X-inefficiency occurs when a firm lacks the incentive to control costs, leading to inefficiency and higher expenditure than is necessary for the level of output produced.

Economies of Scale

Economies of scale refer to the cost advantage achieved by an increase in production, which typically leads to a reduction in average cost per unit as scale increases.

Average Total Costs

Average total costs represent the total costs of production (fixed and variable costs combined) divided by the quantity of output produced.