Question

Interest rate swaps: can change exposure to interest rate fluctuations. are one of the oldest interest rate hedging devices. allows for the exchange of amounts in different currencies by two parties. are rigid and inflexible. None of the options are correct.

Answer 1

ANSWER: 1 ,2 &3

1.True.Interest rate swaps are forward contracts for swapping/exchanging the interest cash-flow streams between the seller & the buyer-

ie. Exchanging fixed interest stream for floating interest stream

this is done mainly to reduce the impact/exposure to interest fluctuations, to access a lower interest rate.

2. Yes.A company that expects the long-term interest rates to rise, will hedge its exposure to interest rate changes by exchanging its floating interest rate payments for fixed interest rate payments.

3.Yes. A party operating in a particular currency can borrow from a party located in some other country , in the latter's currency, where the interest rates are less---pay him lesser interest all through the life of the bond--at the end swap the face value of the principal at the agreed exchange rate , at the time of the loan's maturity & thus also avoid any exposure to exchange-rate fluctuations.

4. FALSE--IRS are highly liquid & their positions changed/reversed with ease and are extensively used in forward trades.

5.FALSE--- 1,2 & 3 apply.