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.

Question

Quizplus · Accepted Answer

In a plain Vanilla swap, the swap buyer agrees to make 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. The swap seller, in turn, agrees to make floating-interest payments to the swap buyer, based on the same notional amount and the same payment schedule as the underlying loan. This allows the swap buyer to hedge against the risk of rising interest rates on their floating-rate loan.

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