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FRM Part I · FRM Exam Part I · Swaps

In which situation is an amortizing swap, rather than a standard swap with constant notional, most appropriate?

An amortizing swap suits a firm hedging a loan repaid in installments, because the swap's notional principal falls over time on a schedule that matches the declining loan balance, keeping the hedge aligned with the actual exposure.

  1. AA firm that wants to speculate on the shape of the yield curve with no underlying exposure
  2. BA firm that wants to swap a floating payment for a floating payment in a different currency
  3. CA firm hedging a loan whose principal is repaid in installments over time, so the hedged balance declinesCorrect
  4. DA firm wanting an option to cancel the swap at a future date

Explanation

An amortizing swap has a notional that declines on a schedule, matching a loan repaid in installments. A cancellable feature describes a swaption or callable swap, not amortizing. Swapping floating for floating in different currencies is a currency basis swap.

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