Final answer:
Horizon analysis is a technique used in finance to assess the future cash flows and risks associated with investments. In swap analysis, it is used to project the cash flows of a swap contract. Difficulties in horizon analysis include predicting future interest rates, uncertainty in counterparties' creditworthiness, and changing market conditions and regulations.
Step-by-step explanation:
Horizon analysis is a technique used in finance to assess the future cash flows and risks associated with investments. In the context of swap analysis, horizon analysis is used to project the cash flows of a swap contract over its duration.
Horizon analysis for swap contracts involves estimating the future cash flows by taking into account the fixed and floating interest rates, the notional amount, and the remaining time to maturity of the swap. This analysis helps investors evaluate the profitability and risk of the swap contract.
However, there are a few difficulties encountered in horizon analysis. One challenge is accurately predicting future interest rates, which can significantly impact the cash flows of swap contracts. Another difficulty is the uncertainty surrounding the creditworthiness of the counterparties involved in the swap. Additionally, market conditions and regulations may change over time, making it challenging to accurately project the cash flows and risks beyond a certain horizon.