Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." Select the definitions that best describe each.
A)"Basis risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap,and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index.
B)"Basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.
C)"Basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an opposing counterparty the other side of an interest rate swap entered into with a counter party,and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.
D)"Basis risk" refers to the risk of fluctuating exchange rates,and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index.

Question

Quizplus · Accepted Answer

Basis risk refers to the situation where the floating rates of the two counterparties are not pegged to the same index, while sovereign risk refers to the risk that a country may impose exchange restrictions on the currency involved in the swap. Option B correctly defines both terms. Option A interchanges the definitions, while option C describes a different risk altogether. Option D partially defines basis risk, but sovereign risk is not about fluctuating exchange rates.

Some of the Risks That a Swap Dealer Confronts Are