Interest Rate Swaps for Check-Cashing Establishments: Selling the Treasurer on the Benefits

Using Interest Rate Swaps to Enhance Financial Strategy for Check-Cashing Establishments

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Question

Kep Polznik is a financial consultant to an entrepreneur who owns a chain of check-cashing establishments (individuals who meet certain criteria can cash post- dated checks and then repay the money at a later date). The company's Treasurer is considering using plain vanilla swaps. Which of the following statements should Polznik NOT use to sell the Treasurer on the use of interest rate swaps?

Answers

A. The Treasurer can use swaps to exploit market inefficiencies.

B. The swap market's operational efficiency results in reduced transaction costs.

C. Swap agreements allow companies a more flexible way to package cash flows.

D. By using swaps, the Treasurer can maintain the confidentiality of business strategy.

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Explanations

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A. B. C. D.

Exploiting market inefficiencies is no longer considered a motivation for entering into swap agreements. Historically, there were two basic motivations for swaps, to exploit market inefficiencies and to attempt to obtain cheaper financing. Both were based on the belief that financial markets are inefficient. Today, the swap markets have matured and there are few arbitrage opportunities. The swap markets are considered operationally efficient and flexible. Thus, the main reasons to enter into swap agreements include: to reduce transaction costs, to avoid costly regulations, and to maintain privacy.

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