Some of the Risks That a Swap Dealer Confronts Are

Multiple Choice

Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined as

A) "basis risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index.
B) "basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.
C) "basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an opposing counterparty the other side of an interest rate swap entered into with a counterparty, and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap.
D) "basis risk" refers to the risk of fluctuating exchange rates, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index.