In a 'Plain Vanilla Swap' the Swap Buyer Agrees to Make

question 68

Multiple Choice

In a 'plain Vanilla swap' the swap buyer agrees to make:

• A)fixed-interest payments to the swap seller on a loan that is originally floating, but which is then modified through the use of derivatives to turn it into a fixed-rate loan
• B)fixed-interest payments to the swap seller on a loan that is originally fixed, but which is then modified through the use of derivatives to turn it into a floating-rate loan
• C)floating-interest payments to the swap seller on a loan that is originally floating, but which is then modified through the use of derivatives to turn it into a fixed loan
• D)None of the listed options are correct.

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Definitions:

Single-Factor Market Model

A financial model that explains a security's returns as the outcome of a single market-wide factor and the security's sensitivity to that factor.

Unsystematic Risk

The risk associated with a specific company or industry that can be mitigated through diversification.

Residuals

Residuals are differences between observed and predicted values in statistical models, used to assess the fit of models to data.

Market Portfolio

A theoretical portfolio consisting of all assets available in the market, weighted by their market capitalization.