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:

Authority

The right or power assigned to an individual or organization to make decisions, give orders, and enforce obedience.

Traditional View

A perspective or approach that emphasizes historical precedence and the continuity of certain values, practices, and institutions over time.

Organizational Effectiveness

The capability of an organization to achieve its goals efficiently and effectively, maximizing resource utilization for the desired outcomes.

Societal Expectations

The standards and norms that society deems acceptable or desirable, influencing individual behavior and social interactions.