Question

52. Consider the following five statements: i. Swaps may be used to achieve a lower cost of funds for a company. ii. In an interest rate swap, the two parties swap the principal amount plus the ongoing associated interest obligations. iii. An intermediated swap is said to be ‘matched' when a bank enters into swaps with both firms involved in an interest rate swap iv. A ‘plain vanilla' swap is the fixed AUD to floating AUD swap. v. If an intermediary is involved in a swap between two parties, the intermediary will also provide the initial loan to both parties. Which of the following are correct? A. i, ii, iii and iv are true B. ii, iii, iv and v are true C. ii, and iv are true D. i and iii are true

why choose d can help explain why other three are incorrect?????

Answer 1

D. i and iii are correct.

i. swaps may be used to achive a lower cost of funds for a company.- Swaps are the financial instuments which are mainly used to hedge certain risks.

ii.In an interest rate swap, the two parties swap the principal amount plus the ongoing associated interest obligations. - this statement is incorrect since in interest rate swaps, parties only exchange the notional amount or the net amount from the contract instead of the principal amount.

iii. An imtermediate swap is said to be matched when a bankenters into swaps with both firms involved in an interest rate swaps- this statement is correct.

iv. A plain vanilla swap is the fixed AUD to floating AUD swap- incorrect. a plain vanillla swap is that in which one party agrees to pay a predetermined fixed rate of interest on the notional principal on specific date.

v. If an intermediary is involved in a swao between two parties, the intermediary will also provide the initial loan to both parties. - an intermidiary matches the counterparties in swaps but does not assume any kind of risk with them.