A tool for managing interest-rate risk that requires exchange of payment streams is a
A)futures contract.
B)forward contract.
C)swap.
D)micro hedge.

Question

Quizplus · Accepted Answer

A swap is a financial contract in which two parties agree to exchange streams of payments. It is commonly used to manage interest-rate risk, where one party may have a fixed-rate interest obligation and the other party has a variable-rate interest obligation. By entering into a swap agreement, both parties can manage their interest-rate risk by exchanging payment streams. Futures and forward contracts also allow for the management of interest-rate risk, but they do not involve the exchange of payment streams. Micro hedge is not a commonly used term in finance, and therefore is not a relevant answer.

A Tool for Managing Interest-Rate Risk That Requires Exchange of Payment