Answer (A) is correct . Swaps are contracts to hedge risk by exchanging cash flows. In an interest-rate swap, one firm exchanges its fixed interest and principal payments for a series of payments based on a floating rate. If a firm has debt with fixed charges, but its revenues fluctuate with interest rates, it may prefer to swap for cash outflows based on a floating rate. The advantage is that revenues and the amounts of debt service will then move in the same direction, and interest-rate risk will be reduced. A currency swap is an exchange of an obligation to pay out cash flows denominated in one currency for an obligation to pay in another. For example, a U.S. firm with revenues in francs has to pay suppliers and workers in dollars, not francs. To minimize exchange-rate risk, it might agree to exchange francs for dollars held by a firm that needs francs. The exchange rate will be an average of the rates expected over the life of the agreement.
Answer (B) is incorrect because Contracts to hedge risk by exchanging cash flows include interest-rate swaps and currency swaps.
Answer (C) is incorrect because Contracts to hedge risk by exchanging cash flows include interest-rate swaps and currency swaps.
Answer (D) is incorrect because Contracts to hedge risk by exchanging cash flows include interest-rate swaps and currency swaps.
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