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      Question

      A financial contract involves exchanging fixed cash

      flows in one currency for floating cash flows in another. What best describes this arrangement?
      A Forward contract Correct Answer Incorrect Answer
      B Futures contract Correct Answer Incorrect Answer
      C Swap agreement Correct Answer Incorrect Answer
      D Option contract Correct Answer Incorrect Answer
      E Repo transaction Correct Answer Incorrect Answer

      Solution

      Swaps involve exchange of cash flows (often fixed vs floating), typically combining spot + forward elements. A currency swap is a financial contract that involves exchanging principal and fixed-rate interest payments in one currency for principal and floating-rate interest payments in another currency. These agreements are used to manage long-term foreign exchange risk and to hedge interest rate exposure.

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