Asked by Lizbeth RamosPerdomo on Jul 15, 2024
Verified
One reason swaps are desirable is that
A) they are free of credit risk.
B) they have no transactions costs.
C) they increase interest rate volatility.
D) they increase interest rate risk.
E) they offer participants easy ways to restructure their balance sheets.
Interest Rate Volatility
The degree of variation of interest rates over time, impacting the valuation of financial instruments and the ability to forecast future rates.
Balance Sheets
Financial statements that summarize a company's financial position, including assets, liabilities, and shareholders' equity at a specific point in time.
Swaps
Financial agreements to exchange or "swap" cash flows or other financial instruments between two parties, typically involving interest rates, currencies, or commodities.
- Recognize the benefits swaps provide in managing financial risks and restructuring balance sheets.
Verified Answer
TM
Tyler MatuszczakJul 16, 2024
Final Answer :
E
Explanation :
Swaps are desirable because they offer participants an efficient method to restructure their balance sheets, allowing them to adjust their exposure to various financial risks (such as interest rate or currency risks) in a tailored manner. Swaps do not eliminate credit risk, typically involve transaction costs, and do not inherently increase interest rate volatility or risk; instead, they are tools for managing such exposures.
Learning Objectives
- Recognize the benefits swaps provide in managing financial risks and restructuring balance sheets.