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.
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.
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Chapter 21 Solutions
Fundamentals of Corporate Finance
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