ACCA Financial Management (F9) Certification Practice Exam

Which of the following best describes a swap in the context of foreign exchange?

1. A trade agreement for one type of currency

2. An informal agreement between two parties

3. A formal agreement to exchange payments

4. A contract to hedge against future payment

The correct answer is: A formal agreement to exchange payments

The correct answer accurately captures the nature of a swap in the context of foreign exchange. A swap involves a formal agreement between two parties to exchange cash flows, which can include interest payments or different currencies over a specified period. In foreign exchange, this typically refers to a currency swap where two parties agree to exchange principal amounts of different currencies and then swap the equivalent amounts back at a later date, often at a predetermined exchange rate. Options that suggest a trade agreement for one type of currency or describe an informal agreement do not encompass the structured nature and purpose of a swap. Likewise, while a swap can be related to hedging strategies, simply stating it as a contract to hedge against future payments does not fully capture the formal and reciprocal nature of the exchange necessary to define a swap in foreign exchange markets.