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    Question

    Which of the following derivative instrument is a type

    of financial derivative in which fixed payments of interest are exchanged by two counterparties for floating payments of interest?
    A Interest rate option Correct Answer Incorrect Answer
    B Index option Correct Answer Incorrect Answer
    C Interest rate swap Correct Answer Incorrect Answer
    D Future contract Correct Answer Incorrect Answer
    E Repo contract Correct Answer Incorrect Answer

    Solution

    A swap is an agreement between two counter parties to exchange cash flows in the future. Under the swap agreement, various terms like the dates when the cash flows are to be paid, the currency in which to be paid and the mode of payment are determined and finalized by the parties. Usually the calculation of cash flows involves the future values of one or more market variables. There are two most popular forms of swap contracts, i.e., interest rate swaps and currency swaps.

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