____ risk prevents the interest rate swap from completely eliminating a financial institution's exposure to interest rate risk.

Question

Quizplus · Accepted Answer

Basis risk refers to the risk that the interest rate swap may not perfectly hedge the underlying exposure because the swap is based on a different index or index maturity than the underlying exposure. Therefore, it prevents the complete elimination of interest rate risk. Credit risk refers to the risk of a counterparty defaulting on its obligations, and sovereign risk refers to the risk that a government may default or impose capital controls, neither of which are directly related to interest rate swaps.

____ Risk Prevents the Interest Rate Swap from Completely Eliminating