Which of the following statements is incorrect regarding swaps?
A) Swaps involve the use of a dealer or over-the-counter market and there is credit risk with swaps.
B) Many firms enter into swap arrangements to convert an existing fixed rate liability into a floating rate liability or vice versa.
C) Swaps allow companies to better manage risks by shifting the risk to other parties, who are willing to bear this risk for a price.
D) Common types of swaps are interest rate swaps, currency swaps, commodity swaps, equity swaps, and credit default swaps.
E) A plain vanilla swap is a type of currency swap in which a party transforms a liability in one currency for a liability in another currency.

Question

Quizplus · Accepted Answer

A plain vanilla swap typically refers to the simplest version of an interest rate swap, where one party exchanges a stream of interest payments in one currency for another party's stream of interest payments in another currency, not necessarily transforming liabilities across currencies as described.

Which of the Following Statements Is Incorrect Regarding Swaps