Basis risk exists on interest rate swaps because the interest rate on the swap agreement may differ from the interest rate on assets and liabilities that the parties hold.

Question

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Basis risk refers to the risk that the interest rate on the swap agreement may differ from the interest rate on other related financial instruments that the parties hold. This difference can lead to potential losses or gains for either party. Therefore, basis risk is a real concern for those who engage in interest rate swaps.

Basis Risk Exists on Interest Rate Swaps Because the Interest