A swap deal is executed by:Select one:a.Settling the difference int he ratesb.Actual delivery of currenciesc.Entering into another swap deald.None of the above
Question
A swap deal is executed by:Select one:a.Settling the difference int he ratesb.Actual delivery of currenciesc.Entering into another swap deald.None of the above
Solution
A swap deal is executed by:
a. Settling the difference in the rates
In a swap deal, two parties agree to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined by a random or uncertain variable, such as a floating interest rate, foreign exchange rate, equity price, or commodity price.
The cash flows are calculated over the notional principal amount. This amount, usually a large dollar amount, is not exchanged between counterparties. Consequently, swaps can be in cash or collateral.
The swap agreement defines the dates when the cash flows are to be paid and the way they are accrued and calculated. Usually, these are done at the end of the swap agreement, but they can also be done in the beginning.
Therefore, a swap deal is executed by settling the difference in the rates.
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