easy · FRM Part 1
If a 2-year swap has annual resets and the current 1-year and 2-year zero rates are 3% and 4%, why might the 2-year swap rate be approximately 3.98%?
- The swap rate is simply the average of the 1-year and 2-year zero rates.
- The swap rate includes a premium for the convexity adjustment between forwards and futures.
- The swap rate is a coupon-weighted average of the underlying zero rates for all payment dates.
- Market makers always set the swap rate at a fixed 2-basis-point discount to the zero curve.
Sign up free to see the explanation and track your rank →
More FRM Part 1 practice
- According to the CAPM, which type of risk are investors compensated for bearing?
- What specific variety of liquidity risk is being described?
- How is 'Risk Capacity' distinguished from 'Risk Appetite' in a standard risk governance fr
- If a loan has a Probability of Default (PD) of 2.0%, an Exposure at Default (EAD) of $1,00
- If two portfolios have the same Sharpe ratio but one has positive skewness and the other h
- In a 'Liquidity Spiral', what is the primary channel by which market liquidity risk and fu
- In the context of the CAPM, what is the definition of 'Alpha' (α)?
- In the risk decomposition formula σ^2_i = β^2_i σ^2_M + σ^2_ε, what does σ^2_ε represent?