Some of the Risks That a Swap Dealer Confronts Are

question 35

Multiple Choice

Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined as

• A)"basis risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index.
• B)"basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.
• C)"basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an opposing counterparty the other side of an interest rate swap entered into with a counterparty, and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.
• D)"basis risk" refers to the risk of fluctuating exchange rates, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index.

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Definitions:

Public Sector

The portion of an economy that is controlled by the government, including various public services and enterprises.

Supreme Authority

The highest level of command or control in an organization or a system.

Tax Payer

An individual or entity that is obligated to make contributions to government funds through the payment of taxes.

Bargaining Power

The capacity of one party to influence the outcome of negotiations by controlling resources or circumstances that are desirable to the other party.