Benefits of Using Swaps in Interest Rate Management

Very Hard Derivative Markets And Instruments Uses Of Derivatives

In the realm of financial markets, derivatives are used for various purposes, including risk management, speculation, and arbitrage. One particular type of derivative is the swap, which allows two parties to exchange cash flows based on different financial instruments. Consider the following scenario:

A corporate treasurer is confronted with potential interest rate fluctuations that could affect the company's debt obligations. To mitigate this risk, the treasurer considers entering into an interest rate swap, where the company pays a fixed interest rate, and receives a variable interest rate.

Which of the following statements accurately reflects the benefits of using a swap in this context?

The swap allows the company to lock in interest payments at a lower fixed rate, thereby simplifying cash flow management and reducing uncertainty.

The use of the swap eliminates the need for underlying assets, freeing up capital for other investments while maintaining debt flexibility.

The interest rate swap guarantees a profit regardless of market rate changes, thus eliminating all financial risk related to interest rate exposure.

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