Explanation:
Unique among swaps, equity swap payments may be floating on both sides (and the payments not known until the end of the settlement period). Similar to options, premiums for swaptions are dependent on the strike rate specified in the swaption. The most common reason for entering into commodity swap agreements is to control the costs of purchasing resources, such as oil and electricity. A negative index return requires the fixed-rate payer to pay the percentage decline in the index.
(Book 3, Module 46.3, LO 46.l)
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Question 44
Many different types of swaps exist, including interest rate swaps, currency swaps, commodity swaps, equity swaps, and volatility swaps. A swaption is an option that gives the holder the right to enter into a swap. Which of the following statements about swaps and swaptions is most likely correct?
A
Equity swap payments may be floating on both sides.
B
Unlike options, premiums for swaptions are not dependent on the strike rate specified in the swaption.
C
The most common reason for entering into commodity swap agreements is to speculate on commodity prices.
D
For the fixed-rate payer in an S&P 500 Index swap, a negative index return does not require a payment from the fixed-rate payer.
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