CFA Practice Question

There are 275 practice questions for this study session.

CFA Practice Question

Which of the following statements about swap agreements is FALSE?

A. They are standardized agreements, similar to futures.
B. Counterparties are the principles who engage in a swap agreement.
C. They allow for the exchange of different sets of future cash flows.
D. Interest rate and currency swaps are common types of swaps.
Correct Answer: A

A swap is an agreement between two or more counterparties to exchange (swap) cash flows over a specified future period. Swaps are flexible because, unlike futures, they are custom-tailored to meet the needs of the specific counterparties involved in the agreement. Common types are interest rate and foreign currency swaps.

User Contributed Comments 3

User Comment
cy166099 What specific types of companies would be interested to do a swap agreement?
Kevdharr cy166099, really a number of different companies can utilize swaps. Essentially any company that needs funding and wants to borrow money using a specific type of rate. In many cases, swaps are used by companies that desire a type of interest rate structure (i.e., fixed or floating) that another firm can obtain at a lower cost. So let's say company A wants to borrow at a fixed rate and company B wants to borrow at a floating rate. Furthermore, let's assume that company B can borrow at a better FIXED rate than company A and company A can borrow at a better FLOATING rate than company B. The two would enter into an interest rate swap agreement that would effectively enable them to borrow at the kind of rates that they desire and at a better rate than they would have otherwise been able to obtain.
farhan92 a lot of hedge funds use swaps..but then again hedge funds like a bit of everything
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