On sample exam 2. A client has a liability in a swap position. The question asks, What is the most appropriate way to terminate this swap position. I chose the answer with the offsetting swap so they would cancel out. The answer is settle in cash. So if they ask for the best way to exit a position? Is it always cash if that option is available?
ifyou want to terminate then best way is to tear up the contract and settle in cash. Offsetting swap will just leave you with two contracts (albeit cashflows are cancelled out).
Seems like a stupid question. What the point in teaching how to offset a liability if the best thing to do is just settle in cash. I believe concept wise settle in cash and using an offsetting swap are similar. Does this have to do whether the liability is a futures contract or forward. Swaps are customizable with no exchange in between so you have more credit risk if you use another swap? But offsetting futures would be the same as cash settlement?