Which statement is true regarding swaps compared to other derivative instruments?

Swaps are indeed less standardized than futures or options, which is a key aspect of their nature. Unlike standardized derivatives such as futures contracts, which are traded on exchanges with predetermined contract sizes, expiration dates, and terms, swaps are typically customized agreements that are negotiated directly between the parties involved. This customization allows parties to tailor the swap to fit their specific risk management needs, such as varying notional amounts, payment structures, and duration.

The less standardized nature of swaps allows for greater flexibility and adaptability in meeting the unique requirements of the involved parties. For example, two companies can create a swap that precisely matches their cash flow exposures without being constrained by the limits of standard contracts. This characteristic is significant because it differentiates swaps from more standardized instruments, which are easily tradable but may not meet all specific hedging or investment strategies.

In contrast to this, the other statements do not accurately reflect the nature of swaps. Swaps are not limited to hedging purposes; they can certainly be used for speculative strategies as well. Therefore, the idea that they are strictly for hedging does not encompass the full range of their application. Additionally, while swaps can certainly serve hedging purposes, many market participants also engage in swaps for speculative reasons, such as taking