During the term of a swap, whenever interest rates vary unexpectedly, the swap will develop value for one swap party or the other.

Question

Quizplus · Accepted Answer

This is because the swap contract is based on a fixed interest rate and a floating interest rate. If the floating interest rate unexpectedly increases, the party paying the fixed rate will benefit as they will be receiving more than what they would without the swap. On the other hand, if the floating interest rate unexpectedly decreases, the party receiving the fixed rate will benefit as they will be paying out less than what they would without the swap. Therefore, the swap will develop value for one party or the other depending on the movement of interest rates.

During the Term of a Swap, Whenever Interest Rates Vary