What is the basic reason that two counterparties enter into a swap agreement?
A)Exchange of one specified cash flow in the future based on some underlying index.
B)Better management of credit risk by using a fixed or floating rate bond as hedging instrument.
C)To restructure or off-set the expected future cash flows to be collected from assets or liabilities held on the balance sheet.
D)Exchange of assets for a specific period of time at a specified interval.

Question

Quizplus · Accepted Answer

The basic reason that two counterparties enter into a swap agreement is to restructure or off-set the expected future cash flows to be collected from assets or liabilities held on the balance sheet, such as managing exposure to interest rate risks or currency risks. Swaps do not involve exchange of assets, rather they involve the exchange of cash flows related to the assets. Option A refers to a futures contract, option B refers to a bond, and option D refers to a repurchase agreement (repo).

What Is the Basic Reason That Two Counterparties Enter into a Swap