Explanation

Statement 1: "Swaps are contingent claims." - This statement is incorrect.

• Contingent claims are derivatives whose payoff depends on the occurrence of a specific event or condition. Examples include options, where the payoff depends on whether the underlying asset price reaches a certain level.
• Swaps are not contingent claims. They are forward commitments where both parties are obligated to make payments based on predetermined terms, regardless of specific events occurring.

Statement 2: "Swaps are characterized by a series of cash flows." - This statement is correct.

• Swaps involve multiple exchanges of cash flows over time, typically at regular intervals (e.g., quarterly, semi-annually).
• For example, in an interest rate swap, one party pays a fixed rate while the other pays a floating rate, with these payments occurring at specified intervals throughout the swap's life.

Therefore, only Statement 2 is correct.

Correct Answer: B (Statement 2 only)