What is the name of the derivative contract where two parties exchange cash flows or liabilities?

What is the name of the derivative contract where two parties exchange cash flows or liabilities?

• A. Credit Swap
• B. Equity Swap
• C. Currency Swap
• D. Interest Rate Swap

Answer: (A)

The derivative contract where two parties exchange cash flows or liabilities is known as a credit swap. In a credit swap, participants agree to exchange cash flows based on the credit risk of certain assets or liabilities. This typically involves one party making payments that depend on the performance of a reference entity, while the other party provides compensation if that entity defaults. This type of swap is particularly useful for institutions wanting to manage their credit exposure. While the other options refer to different types of swaps that involve exchanges of cash flows related to equity, currency, or interest rates, they do not capture the specific context of credit risk management that defines a credit swap. Thus, the appropriate answer aligns with the unique characteristics of credit exposure exchange found in credit swaps specifically.

The derivative contract where two parties exchange cash flows or liabilities is known as a credit swap. In a credit swap, participants agree to exchange cash flows based on the credit risk of certain assets or liabilities. This typically involves one party making payments that depend on the performance of a reference entity, while the other party provides compensation if that entity defaults. This type of swap is particularly useful for institutions wanting to manage their credit exposure.

While the other options refer to different types of swaps that involve exchanges of cash flows related to equity, currency, or interest rates, they do not capture the specific context of credit risk management that defines a credit swap. Thus, the appropriate answer aligns with the unique characteristics of credit exposure exchange found in credit swaps specifically.