A Basis Swap Is Priced by Adding a Spread to the Higher

question 21

Multiple Choice

A basis swap is priced by adding a spread to the higher rate or subtracting a spread from the lower rate.This spread is found as

• A)the difference between the floating rate on a plain vanilla swap based on one of the rates and the fixed rate on a plain vanilla swap based on the other rate.
• B)the addition of the fixed rate on a plain vanilla swap based on one of the rates and the fixed rate on a plain vanilla swap based on the other rate.
• C)the difference between the fixed rate on a plain vanilla swap based on one of the rates and the fixed rate on a plain vanilla swap based on the other rate.
• D)the difference between the floating rate on a plain vanilla swap based on one of the rates and the floating rate on a plain vanilla swap based on the other rate.
• E)none of the above correctly explain how this spread is found

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Definitions:

Lower of Average Cost

A method to value inventory at the lower of its historical average cost or the market cost, ensuring a conservative asset valuation.

Estimated Inventory

An approximate calculation or judgment of the quantity of goods available in stock.

Cost-to-Retail Ratio

A method used in inventory accounting that calculates the cost of goods available for sale as a percentage of the retail price of the goods.

Net Markdowns

Net markdowns represent the reduction in the selling price of goods or products, often reflecting changes in market demand or stock clearance needs, net of any markdown cancellations.