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.
Which of the following are correct?
A) i, ii, iii and iv are true
B) ii, iii and iv are true
C) i, ii and iii are true
D) i, ii, iii and v are true

Question

Quizplus · Accepted Answer

Statement i is true as a swap can be used to convert a fixed-rate debt into a floating-rate debt. Statement ii is true as a matched swap will create offsetting positions, resulting in no net exposure for the intermediary. Statement iii is true as a cross-currency swap involves the exchange of principal and interest payments in different currencies for the term of the swap. Statement iv is true as the exchange rate used at the principal re-exchange date is based on the prevailing market spot rate. Statement v is false as acting as an intermediary in a swap would still subject a bank to capital adequacy requirements, even if it does not fund the underlying loan facilities. Therefore, options A, B, and D are incorrect.

Consider These Five Statements