Chapter 7 Currency Swaps & Swaps Markets Study Guide Questions 2024.

Chapter 7 Currency Swaps & Swaps Markets Study Guide Questions 2024. Swaps - correct answer Agreement to exchange one security/cash flow for another ("I'll pay yours if you pay mine") Derivative securities exposed to finance price risk (interest rate risk, exchange rate risk, or commodity price risk 2 counter-parties exchange one stream of cash flows for another If other party defaults obligation, opposing party can stop making interest payment of the swap How are swaps different from other derivatives? - correct answer Usually involve long-term (rather then short-term) repetitive exposure to finance price risk Difference check - correct answer Recognizes difference in interest payments paid to swap counterparty to close a deal Check one side gives to other side at the end of any swap agreement EX: interest rate swap- parties swap 2 different interest rates, counterparty who owes more writes a check for the difference between the 2 interest rates instead of both parties writing a check (reduces exposure and costs of both parties writing checks) Notional Principal Amount - correct answer Predetermined dollar amounts on which the exchanged interest payments are based; usually theoretical