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:

Probability

A statistical measure that quantifies the likelihood of a specific event occurring within a set of conditions or experiments.

Normal Model

A statistical model based on the Normal (or Gaussian) distribution, characterized by a symmetrical bell-shaped curve indicating data dispersion.

Presale Testing

An assessment process used by companies to evaluate the viability, market potential, or functionality of a product before it is launched to the public.

Random

The lack of pattern or predictability in events, often referring to a selection method where each item has an equal chance of being chosen.