Purchase Solution

How can swaps reduce the risks of debt, futures, hedging

Not what you're looking for?

Ask Custom Question

1. How can swaps be used to reduce the risks associated with debt contracts?
2. Investors could use futures contracts and swap contracts. Of the two types of contracts, which one has a higher default risk? Why?
3. What is the difference between hedging and speculating?
4. An issue that comes up in hedging is the risk, especially when cross hedging. Why does cross-hedging lead to basis risk?
5. The forward and future markets are regulated. What agency is the chief regulator of futures markets? Why is federal regulation necessary?

Purchase this Solution
Solution Summary

Your tutorial is 567 words and six references and gives a short paragraph on each with examples.

Solution Preview

1. How can swaps be used to reduce the risks associated with debt contracts?

SWAP CONTRACT: Agreement to exchange payments in the future.

Swaps can be used to reduce risk by locking in a fixed rate when you have exposure to a floating rate. By swapping debt terms (fixed for variable), your exposure to future interest rate fluctuations is eliminated, eliminating interest rate risk. You agree to pay the fixed interest payment and the other party agrees to pay the variable rate payment.

2. Investors could use futures contracts and swap contracts. Of the two types of contracts, which one has a higher default risk? Why?

FUTURES CONTRACT: Forward contract with terms standardized for trading exchanges to facilitate trading of instrument.

A futures contract is standardize in terms of quantity and quality and for a specific delivery date and are traded on futures exchanges, which acts as a middle man between the buyer and seller. The expectations are ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
Recent Feedback
  • "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
  • "Thank, this is more clear to me now."
  • "Awesome job! "
  • "ty"
  • "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Introduction to Finance

This quiz test introductory finance topics.

View More Free Quizzes
Related BrainMass Solutions

  • Walt Disney Company's Yen Financing

    Forward contracts are exposed to default risks of the counterparty 3. Futures - Futures are standardized contracts which are traded on the exchanges. That is the only difference between forward contracts and futures.

  • Reducing Exchange Rate Risks

    A company can reduce its exposure to exchange rate risks by utilizing the various hedging mechanisms or tools available in the global financial markets, such as interest rate swaps, futures and forward contracts, call and put options.

  • Summarize the fundamental equilibrium path

    Currency swaps are used to secure cheaper debt and for hedging against exchange rate fluctuations (Kolb & Overdahl, 2014). On the other hand, interest swaps are used for hedging against changes coming in interest rates of the country.

  • Uses of Maturity Gap and Duration Gap

    Explain how portfolio managers can use financial options and futures to hedge interest-rate risk. c. Describe how portfolio managers use financial swaps to control their risk exposure.

  • Risk Management and Mitigation Strategies of Wal-Mart

    On the other hand, company also faces interest rate risk as a result of short-term borrowing and long-term debt issuances (Annual Report, 2014). In this, company can apply hedging instrument such as spot transaction with the currency swaps.

  • Options, Futures and Derivatives- international currency

    Looking at Problem 1, we see the main risks we wish to mitigate by hedging: Interest rate risk - can be hedged many ways, including interest rate swaps, bond trading, and bond futures.

  • Risk Management Techniques in Finance

    Options, Futures, and other Derivatives (6th Ed.). Pearson Education What is hedging & how it helps you trade. (2007).

  • Domestic Financial Management, Arbitrage, Risk, and Contracts

    Question 3 In order to reduce exchange rate risk, a company can enter into different hedging activities such as forwards, futures, swaps, options, swaps, etc.

  • Foreign exchange risk, interest rate and exchange rates

    However, the amount of cash in question will also raise the importance of interest rate risks as small changes in interest rates can really affect the value of forward contracts or other hedging mechanisms use as explained below.

View More Related Solutions