Question 1

Which of the following is an advantage of having swap dealers?

Accepted Answer

A) They serve the function of taking the opposite side of each transaction in order to keep the swap market liquid. 
B) They reduce the search costs of finding counterparties having mirror image financing requirement. 
C) They generally guarantee swap payments over the life of the contract. 
D) They incur any costs associated with the default by replacing the defaulting party on the same terms as the original swap. 
E) All of the options. 
A) They serve the function of taking the opposite side of each transaction in order to keep the swap market liquid. 
B) They reduce the search costs of finding counterparties having mirror image financing requirement. 
C) They generally guarantee swap payments over the life of the contract. 
D) They incur any costs associated with the default by replacing the defaulting party on the same terms as the original swap. 
E) All of the options.

Question 2

Swap transactions are homogeneous in nature so that the contracts can be easily traded in the secondary market for swaps.

Accepted Answer

A) True 
 B)False

Question 3

In the derivatives markets, the credit risk exposure is greatest for

Accepted Answer

A) options. 
B) futures. 
C) forwards. 
D) swaps. 
E) currencies. 
A) options. 
B) futures. 
C) forwards. 
D) swaps. 
E) currencies.

Question 4

Which of the following is NOT a reason for the credit risk on a swap to be less than the credit risk on a loan?

Accepted Answer

A) Swap contracts often extend beyond the maturity of normal loan contracts. 
B) Swap payments can be netted more easily than on a loan contract. 
C) Interest rate swaps involve interest, but not principal. 
D) Differences in credit quality between parties can be equalized through the use of standby letters of credit. 
E) All of the options are reasons for swaps to have less credit risk. 
A) Swap contracts often extend beyond the maturity of normal loan contracts. 
B) Swap payments can be netted more easily than on a loan contract. 
C) Interest rate swaps involve interest, but not principal. 
D) Differences in credit quality between parties can be equalized through the use of standby letters of credit. 
E) All of the options are reasons for swaps to have less credit risk.

Question 5

The buyer of an interest rate swap is likely to have a negative duration gap that they would like to reduce.

Accepted Answer

A) True 
 B)False

Question 6

A standard agreement without any special features is referred to as:

Accepted Answer

A) a plain vanilla agreement. 
B) an interest rate swap. 
C) a generic swap. 
D) macrohedging 
E) a currency swap 
A) a plain vanilla agreement. 
B) an interest rate swap. 
C) a generic swap. 
D) macrohedging 
E) a currency swap

Question 7

Swap contracts are actively traded on the

Accepted Answer

A) NYSE. 
B) AMEX. 
C) CBOE. 
D) CFTC. 
E) Swaps are not actively traded. 
A) NYSE. 
B) AMEX. 
C) CBOE. 
D) CFTC. 
E) Swaps are not actively traded.

Question 8

Determining the pricing of a swap agreement requires the calculation of expected one-year rates from the Treasury yield curve that is accomplished by calculating the spot or zero-coupon discount yield curve.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is the primary factor that determines the fixed and floating rates set at the time an interest rate swap is initiated?

Accepted Answer

A) Actual market rates that materialized over the life of the swap contract. 
B) London interbank offer rate (LIBOR). 
C) Upfront fee payments. 
D) Market's expectations of future short-term rates. 
E) Varying notional values underlying the swap. 
A) Actual market rates that materialized over the life of the swap contract. 
B) London interbank offer rate (LIBOR). 
C) Upfront fee payments. 
D) Market's expectations of future short-term rates. 
E) Varying notional values underlying the swap.

Question 10

It is possible to negotiate a swap in which the notational value changes over the life of the swap.

Accepted Answer

A) True 
 B)False

Question 11

A swap that technically is a succession of forward contracts on interest rates is

Accepted Answer

A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap. 
E) an interest rate swap. 
A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap. 
E) an interest rate swap.

Question 12

In a conventional interest rate swap agreement, the swap buyer agrees to make a number of fixed interest rate payments to the swap seller.

Accepted Answer

A) True 
 B)False

Question 13

A U.S.bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million.The current exchange rate is $1.50/£.The interest payments will be exchanged at the end of the year at the prevailing rates. At the end of year 3, LIBOR rates are 6 percent and the exchange rate is $1.10/£.What is the net payment paid or received in dollars by the U.S.bank?

Accepted Answer

A) The U.S.bank paid $12 million and received $16.5 million for a net receipt of $4.5 million. 
B) The U.S.bank paid $12 million and received $11 million for a net payment of $1 million. 
C) The U.S.bank paid $12 million and received $12 million for a net payment of $0 million. 
D) The U.S.bank paid $9 million and received $11 million for a net receipt of $2 million. 
E) The U.S.bank paid $9 million and received $12 million for a net receipt of $3 million. 
A) The U.S.bank paid $12 million and received $16.5 million for a net receipt of $4.5 million. 
B) The U.S.bank paid $12 million and received $11 million for a net payment of $1 million. 
C) The U.S.bank paid $12 million and received $12 million for a net payment of $0 million. 
D) The U.S.bank paid $9 million and received $11 million for a net receipt of $2 million. 
E) The U.S.bank paid $9 million and received $12 million for a net receipt of $3 million.

Question 14

The vast majority of credit derivative contracts held by commercial banks consist of credit

Accepted Answer

A) forward contracts. 
B) futures contracts. 
C) options. 
D) swaps. 
E) currency contracts. 
A) forward contracts. 
B) futures contracts. 
C) options. 
D) swaps. 
E) currency contracts.

Question 15

One reason for basis risk in an interest rate swap is that changes in the index on the variable rate portion of the swap may not be perfectly correlated with changes in the index on the balance sheet portion of the liabilities.

Accepted Answer

A) True 
 B)False

Question 16

In some cases, the swap dealer will enter into a swap agreement and take one side themselves.

Accepted Answer

A) True 
 B)False

Question 17

By 2008, the insurance company AIG had more than $440 billion in credit default swaps outstanding.

Accepted Answer

A) True 
 B)False

Question 18

A bank has assets of $500,000,000 and equity of $40,000,000.The assets have an average duration of 5.5 years, and the liabilities have an average duration of 2.5 years.An 8-year fixed-rate T-bond with the same coupon as the fixed-rate on the swap has a duration of 6 years, and the duration of a floating-rate bond that reprices annually is one year.The bank wishes to hedge its balance sheet with swap contracts that have notional contracts of $100,000.What is the optimal number of swap contracts into which the bank should enter?

Accepted Answer

A) 2,500 contracts. 
B) 2,760 contracts. 
C) 13,800 contracts. 
D) 3,200 contracts. 
E) None of the options. 
A) 2,500 contracts. 
B) 2,760 contracts. 
C) 13,800 contracts. 
D) 3,200 contracts. 
E) None of the options.

Question 19

Credit default swaps have non-symmetric risks and exhibit payoff patterns similar to an option contract.

Accepted Answer

A) True 
 B)False

Question 20

A U.S.bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million.The current exchange rate is $1.50/£.The interest payments will be exchanged at the end of the year at the prevailing rates. At the end of the year, LIBOR is 4 percent and the exchange rate is $1.50/£.What is the net payment paid or received in dollars by the U.S.bank?

Accepted Answer

A) The U.S.bank paid $12 million and received $8 million for a net payment of $4 million. 
B) The U.S.bank paid $12 million and received $10 million for a net payment of $2 million. 
C) The U.S.bank paid $12 million and received $12 million for a net receipt of $0 million. 
D) The U.S.bank paid $12 million and received $14 million for a net receipt of $2 million. 
E) The U.S.bank paid $12 million and received $16 million for a net receipt of $4 million. 
A) The U.S.bank paid $12 million and received $8 million for a net payment of $4 million. 
B) The U.S.bank paid $12 million and received $10 million for a net payment of $2 million. 
C) The U.S.bank paid $12 million and received $12 million for a net receipt of $0 million. 
D) The U.S.bank paid $12 million and received $14 million for a net receipt of $2 million. 
E) The U.S.bank paid $12 million and received $16 million for a net receipt of $4 million.

Exam 25: Swaps

Which of the following is an advantage of having swap dealers?

Swap transactions are homogeneous in nature so that the contracts can be easily traded in the secondary market for swaps.

In the derivatives markets, the credit risk exposure is greatest for

Which of the following is NOT a reason for the credit risk on a swap to be less than the credit risk on a loan?

The buyer of an interest rate swap is likely to have a negative duration gap that they would like to reduce.

A standard agreement without any special features is referred to as:

Swap contracts are actively traded on the

Determining the pricing of a swap agreement requires the calculation of expected one-year rates from the Treasury yield curve that is accomplished by calculating the spot or zero-coupon discount yield curve.

Which of the following is the primary factor that determines the fixed and floating rates set at the time an interest rate swap is initiated?

It is possible to negotiate a swap in which the notational value changes over the life of the swap.

A swap that technically is a succession of forward contracts on interest rates is

In a conventional interest rate swap agreement, the swap buyer agrees to make a number of fixed interest rate payments to the swap seller.

The vast majority of credit derivative contracts held by commercial banks consist of credit

One reason for basis risk in an interest rate swap is that changes in the index on the variable rate portion of the swap may not be perfectly correlated with changes in the index on the balance sheet portion of the liabilities.

In some cases, the swap dealer will enter into a swap agreement and take one side themselves.

By 2008, the insurance company AIG had more than $440 billion in credit default swaps outstanding.

Credit default swaps have non-symmetric risks and exhibit payoff patterns similar to an option contract.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Loan Sales

Securitization

Filters