A 5-year swap contract can be viewed as a portfolio of 5 forward contracts with maturities of 1,2,3,4 and 5 years.One important exception is that
A)the forward price is the same for the swap contract but not for the forward contracts.
B)the swap contract will have daily resettlement.
C)the forward contracts will have resettlement risk.
D)none of the options

Question

Quizplus · Accepted Answer

The forward price for each of the 5 forward contracts within a 5-year swap contract would be different due to factors such as interest rate expectations, yield curve changes, and credit risk. However, since the swap contract has a fixed rate, the forward price will be the same for all 5 contracts. This is one of the key benefits of a swap contract as it eliminates potential adjustments to the forward price. Options B and C are incorrect statements as they relate to other types of contracts and are not applicable to a 5-year swap contract. Option D is incorrect as there is a correct answer for this question.

A 5-Year Swap Contract Can Be Viewed as a Portfolio