Question

In 2009 and 2010, investment banks were under fire for interest rate swaps sold to municipalities and nonprofits. For example, California's water resource authority paid about $$\$ 305$$ million, North Carolina paid about $$\$ 60$$ million, and Harvard University paid about $$\$ 923$$ million to unwind swaps agreements. To unwind a swaps position, you make a reverse trade. For example, if you had agreed to a fixed-for-variable swap, you would enter a variable-for-fixed swap. The controversy was caused because many people felt that investment banks had taken advantage of municipalities and nonprofits. Is this argument correct? Why or why not?

   In 2009 and 2010, investment banks were under fire for interest rate swaps sold to municipalities and nonprofits. For example, California's water resource authority paid about $$\$ 305$$ million, North Carolina paid about $$\$ 60$$ million, and Harvard University paid about $$\$ 923$$ million to unwind swaps agreements. To unwind a swaps position, you make a reverse trade. For example, if you had agreed to a fixed-for-variable swap, you would enter a variable-for-fixed swap. The controversy was caused because many people felt that investment banks had taken advantage of municipalities and nonprofits. Is this argument correct? Why or why not?
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Fundamentals of Corporate Finance
Fundamentals of Corporate Finance
Stephen A. Ross;… 11th Edition
Chapter 23, Problem 14 ↓

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Interest rate swaps are financial derivatives where two parties exchange interest rate cash flows, based on a specified principal amount. Typically, one party pays a fixed interest rate while the other pays a variable interest rate. These swaps are used to manage  Show more…

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In 2009 and 2010, investment banks were under fire for interest rate swaps sold to municipalities and nonprofits. For example, California's water resource authority paid about $$\$ 305$$ million, North Carolina paid about $$\$ 60$$ million, and Harvard University paid about $$\$ 923$$ million to unwind swaps agreements. To unwind a swaps position, you make a reverse trade. For example, if you had agreed to a fixed-for-variable swap, you would enter a variable-for-fixed swap. The controversy was caused because many people felt that investment banks had taken advantage of municipalities and nonprofits. Is this argument correct? Why or why not?
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