What Is the Basic Reason That Two Counterparties Enter into a Swap

question 9

Multiple Choice

What is the basic reason that two counterparties enter into a swap agreement?

• A)Exchange of one specified cash flow in the future based on some underlying index.
• B)Better management of credit risk by using a fixed or floating rate bond as hedging instrument.
• C)To restructure or off-set the expected future cash flows to be collected from assets or liabilities held on the balance sheet.
• D)Exchange of assets for a specific period of time at a specified interval.

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Definitions:

Compounded 12 Times Per Year

Refers to the process of applying interest to an original amount of money, with the interest being calculated and added twelve times in a year.

Compounded 365 Times Per Year

A term used in finance to indicate that interest is calculated and added to an account's balance 365 times in one year, or daily.

Composition

The process or result of combining two or more functions by applying one function to the result of the other.

\(5x+9\)

An algebraic expression representing a linear function.