Part 1Interest rate swaps have an advantage over options and futures in that:Part 2
A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.

Question

Part 1Interest rate swaps have an advantage over options and futures in​ that:Part 2
A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.

BlackTom AI · Accepted Answer

In evaluating the statement about interest rate swaps versus options and futures, we need to consider the distinctive features of swaps and how they compare.
Option A: 'There is a large market for them.' While the interest rate swap market is substantial and widely used, the size of the market is not the core advantage when comparing swaps to options and futures. Futures are highly standardized and often more liquid due to exchange trading, and options also have established markets; market size alone does not capture the practical, structural advantages.
Option B: 'They can be written for a long time horizon.' This is a key advantage. Swaps are typically customized over the counter and can have very long maturities, enabling participants to hedge or transform exposures over extended periods. This long horizon flexibility distinguishes swaps from many options and futures, which are often shorter-term or less adaptable in horizon unless specifically structured.
Option C: 'They are more liquid.' In practice, futures exchange-traded contracts tend to be highly liquid and standardized, offering deep liquidity. Over-the-counter swaps are generally less liquid and involve bilateral credit risk considerations, making this statement inaccurate as a general advantage of swaps over futures and options.
Option D: 'They can limit interest rate risk.' While swaps are indeed used to manage or hedge interest rate risk, this is not an exclusive advantage over options and futures; those instruments can also be used to hedge rate risk in many contexts. The wording also remains somewhat broad and does not capture what makes swaps uniquely advantageous in terms of horizon and customization.
Overall, the strongest distinguishing advantage of interest rate swaps in comparison to options and futures is their ability to be written for a long time horizon, reflecting the long-dated, customized nature of many swap agreements.

Homework:Chapter 14 Homework

Part 1Interest rate swaps have an advantage over options and futures in that:Part 2 A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.

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