24-33 What is the basic reason that two counterparties enter into a swap agreement?
A)Exchange of one specified cash flow in the future based on some underlying index.
B)Better management of credit risk by using a fixed or floating rate bond as hedging instrument.
C)To restructure or off-set the expected future cash flows to be collected from assets or liabilities held on the balance sheet.
D)Exchange of assets for a specific period of time at a specified interval.
E)Taking the opposite side of each transaction in order to keep the swap market liquid.

Question

Quizplus · Accepted Answer

The basic reason for entering into a swap agreement is to restructure or offset expected future cash flows from assets or liabilities held on the balance sheet. This can help to manage risk and improve overall financial performance. While some swaps may involve the exchange of cash flows based on an underlying index or asset, this is not the primary reason that counterparties enter into these agreements. Similarly, swaps may be used to manage credit risk, but this is not the fundamental motivation for most swap agreements.

24-33 What Is the Basic Reason That Two Counterparties Enter