Chapter 21, Problem 21.1CTF

Summary Introduction

To discuss: The type of exchange made by the two parties

Introduction:

Exchange rate is the price of a country’s currency that in term of another nation’s currency. This rate of exchange can be either floating or fixed.

Answer to Problem 21.1CTF

The United travel agent is exchanging a fixed rate of payment with the Foreign Travels at a variable rate payment. This form of exchange is called as an interest rate swap.

Explanation of Solution

Interest rate swap is termed as a swap contract in which two parties exchange payment obligations that involves various interest payment-schedule. The most commonly used swap transaction is interest rate swap. In this kind of swap, the parties make fixed-rate payments with exchange of floating-rate payments or vice-versa.

Conclusion

Swap is a derivative instrument where two parties agree to exchange payment responsibility on two financial-liabilities that are identical to each other in the values of principles. However, payment-patterns can vary in different situations because swaps are of two kinds, namely interest rate swap and currency swap.