Chapter 18, Problem 5Q

Summary Introduction

To discuss: The ways in which swaps can be used to reduce risk related with the debt contracts.

Introduction:

A type of financial security whose value is derived from the value of a particular underlying asset is termed as Derivative. This form of financial security consists of two or more parties who enter into an agreement to purchase or sell an asset at a specific price on a particular period. They are four types of derivative securities that are as follows:

• Forward contract
• Future contract
• Swap
• Option