A key reason that firms and financial institutions might participate in an interest rate swap is
A)to transfer interest rate risk to parties that are more willing to bear it.
B)the low information costs of swaps compared with other derivative contracts.
C)the greater liquidity of swaps compared with other derivative contracts.
D)the favorable tax implications of swaps compared with other derivative contracts.

Question

Quizplus · Accepted Answer

The key reason for firms and financial institutions to participate in an interest rate swap is to transfer interest rate risk to parties that are more willing to bear it. This is achieved through the exchange of fixed and floating interest rate payments between the parties involved in the swap. By doing so, each party can mitigate their risk and exposure to interest rate volatility. The other options mentioned, such as low information costs, greater liquidity, or favorable tax implications, may be additional benefits of interest rate swaps, but they are not the primary reason for participating in them.

A Key Reason That Firms and Financial Institutions Might Participate