In a swap arrangement,both parties may be able to receive more favourable funding rates than they would have done without the swap,and the swap dealer receives a spread as well.Where does the cost saving originate from?
A) The bank swap dealer effectively guarantees payments of all obligations.
B) The parties involved in the swap are able to borrow where each has a relative cost advantage.
C) The party paying floating cash flows always pays less than the party paying fixed cash flows.
D) With the bank always acting as a swap counterparty, each party is able to reduce the risk profile.

Question

Quizplus · Accepted Answer

In a swap arrangement, both parties can borrow at a more favorable funding rate based on their respective cost advantages. This cost saving originates from the ability to borrow at a lower rate than they would have been able to do without the swap. Option A is incorrect, as the swap dealer does not guarantee payments of all obligations but acts as a counterparty to the swap. Option C is incorrect, as it depends on the prevailing interest rate conditions. Option D is incorrect, as reducing the risk profile is the outcome of the swap rather than its source of cost savings.

In a Swap Arrangement,both Parties May Be Able to Receive