Exam 25: Swaps

Most swap agreements are negotiated privately without the use of an intermediary.

A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into

When are the standby letters of credit used in swap agreements?

When a bank enters into a fixed-floating currency swap, it is exposed to

The party in a swap that receives fixed-rate payments will always have zero basis risk since the fixed-rate swap payments can be structured to cover the fixed-rate liability payments.

An interest rate swap

The notational value of swaps that are held by commercial banks as of 2015 was over $100 trillion.

Swap transactions are typically heterogeneous in terms of maturities, indexes, used to determine payments, and timing of payments.

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR. Assume that the swap is for two years and that LIBOR is 5.25 percent in year one and 6.25 percent in year two.What will be the net swap cash flow each year if the notional value of a swap is $100 million?

The Wall Street Reform and Consumer Protection Act of 2010 established comprehensive regulation of over-the-counter (OTC) derivatives including swaps.

A plain vanilla fixed-floating interest rate swap may involve a third party that acts as a broker, but is not likely to have any sophisticated special features.

A pure credit swap is similar to buying credit insurance.

The Commodity Futures Trading Commission (CFTC) has jurisdiction over swaps.

Currency swaps can be designed to reduce foreign exchange risk.

In terms of valuation, a 12-year interest rate swap can be can be considered in terms of

Whether fixed-rate or floating-rate, a swap arrangement can be designed to be equivalent to a similar maturity bond.

The extreme growth of the swap market has raised concern about the credit risk exposures of banks engaging in this market.

An FI has purchased an agency security that is an inverse floater at 9 percent minus LIBOR. Which of the following characteristics reflect this type of asset?

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR. What will be the net after-swap yield on assets for the bank?

Once a fixed-floating interest rate swap agreement has been negotiated under no-arbitrage conditions, both parties to the swap agreement know with certainty the exact amount of their respective cash flows.