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.
E)Taking the opposite side of each transaction in order to keep the swap market liquid.

Question

Quizplus · Accepted Answer

The basic reason for entering into a swap agreement is to restructure or off-set expected future cash flows from assets or liabilities on the balance sheet. Swaps allow counterparties to exchange cash flows based on different parameters such as interest rates, currencies, or indices to better align their cash flow expectations with their business objectives. Swaps can also be used for hedging or speculative purposes, but the key motivation is always to manage cash flow risks.

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