the economics of money, banking, and financial markets

424 $

© 2014 Pearson Canada Inc.$

7. 
   

   One advantage of using swaps to eliminate interest-rate risk is that swaps ____.
   A) are less costly than futures
   B) are less costly than rearranging balance sheets
   C) are more liquid than futures
   D) have better accounting treatment than options
   Answer: B
   Diff: 2 Type: MC Page Ref: 344
   Skill: Recall
   Objective List: 14.3 Explain how managers of financial institutions use financial derivatives to
   manage interest-rate and foreign-exchange risk

   
   


8. 
   

   The disadvantage of swaps is that ____.
   A) they lack liquidity
   B) it is easy to arrange for a counterparty
   C) they do not have default risk
   D) they are costly
   Answer: A
   Diff: 2 Type: MC Page Ref: 344 - 345
   Skill: Recall
   Objective List: 14.3 Explain how managers of financial institutions use financial derivatives to
   manage interest-rate and foreign-exchange risk

   
   


9. 
   

   As compared to a default on the notional principle, a default on a swap ____.
   A) is more costly
   B) is about as costly
   C) is less costly
   D) may cost more or less than default on the notional principle
   Answer: C
   Diff: 2 Type: MC Page Ref: 343 - 344
   Skill: Recall
   Objective List: 14.3 Explain how managers of financial institutions use financial derivatives to
   manage interest-rate and foreign-exchange risk

   
   


10. 
    

    Intermediaries are active in the swap markets because ____.
    A) they increase liquidity
    B) they increase default risk
    C) they increase search cost
    D) they do not need counterparties
    Answer: A
    Diff: 2 Type: MC Page Ref: 345
    Skill: Recall
    Objective List: 14.3 Explain how managers of financial institutions use financial derivatives to
    manage interest-rate and foreign-exchange risk