Swaps are used to protect against ____ risk, but they do not automatically protect the two parties from ____ risk.
A) Interest-rate, default
B) Default, liquidity
C) Liquidity, interest rate
D) Call, default
E) Forecasting, principal

Question

Quizplus · Accepted Answer

Swaps, such as interest rate swaps, are financial instruments used to hedge against interest rate risk by exchanging future interest rate payments. However, they do not inherently protect against default risk, which is the risk that one party fails to fulfill their contractual obligations.

Swaps Are Used to Protect Against ____ Risk, but They