Consider these five statements:
i.Swaps can be used to create a synthetic floating rate debt for a company's fixed rate debt.
ii.If an intermediary has arranged a matched swap,it has no net exposure to interest rate risk.
iii.A cross-currency swap differs from an interest rate swap in that,for a cross-currency swap,the principals,as well as the agreed interest obligations,are swapped for the duration of the swap agreement.
iv.With a cross-currency swap,the exchange rate used at the principal re-exchange date is based on the current spot rate at that time.
v.If a bank acts as an intermediary in a swap and does not fund the swap parties' underlying loan facilities,it has no obligation under the bank capital adequacy requirements.
How many of the statements are true and how many are false?
A) 3 statements are true and 2 are false
B) 2 statements are true and 3 are false
C) 4 statements are true and 1 is false
D) 1 statement is true and 4 are false

Question

Quizplus · Accepted Answer

i. True - Swaps can indeed be used to convert fixed rate debt to synthetic floating rate debt, allowing companies to manage their interest rate exposure.ii. False - Even if an intermediary has arranged a matched swap, it still faces counterparty risk if one side of the swap defaults.iii. True - A cross-currency swap involves the exchange of principal amounts in different currencies and the interest on these amounts, unlike an interest rate swap which involves only the interest payments.iv. False - In a cross-currency swap, the exchange rate for the re-exchange of principal is typically fixed at the outset of the agreement, not based on the spot rate at the time of re-exchange.v. True - If a bank acts merely as an intermediary in a swap without funding the underlying loans, it generally does not have capital adequacy obligations for those swaps, as it is not considered to have taken on credit exposure.

Consider These Five Statements