Derivatives - Derivatives Section 1
- Option : A
- Explanation : A credit default swap (CDS) is a derivative in which the seller provides credit protection to the buyer against the credit risk of a separate party. It is hence classified as a contingent claim. B and C are incorrect because futures contracts and interest rate swaps are classified as forward commitments.
27. Which of the following is most likely to be correct regarding interest rate swaps?
- Option : C
- Explanation : Interest rate swaps are forward commitments that require one party to pay a fixed rate and the other party to pay floating rate during the life of the swap. A and B are incorrect because they are characteristics of credit default swaps.
29. Which of the following statements is least likely correct about interest rate swaps?
- Option : C
- Explanation : Interest rate swaps are derivatives where two parties agree to exchange a series of cash flows. Typically, one set of cash flows is variable and the other set is variable. Option C is a true statement with respect to call options, not swaps.
30. Which of the following is least likely to be subject to default?
- Option : B
- Explanation : Futures are exchange traded contracts with a credit guarantee and a protection against default. Interest rate swaps and forwards are over-thecounter contracts that are privately negotiated and are subject to default
