Exam 25: Swaps

Bank USA has fixed-rate assets of $50 million funded by fixed-rate liabilities of 75 million Euros paying an interest rate of 10 percent annually.Bank Dresdner has fixed-rate assets of €75 million funded by fixed-rate liabilities of $50 million paying an interest rate of 10 percent annually.The current exchange rate is €1.50/$.They agree to swap interest payments on their liabilities to hedge against currency risk exposure for two years. The transaction each year consists of

The type of swap that is in the largest segment of the global swap market is

One reason for the rapid growth of the OTC interest rate and foreign exchange swap markets is that banks are not required to allocate any capital toward using swap agreements.

The credit risk on an interest rate swap is generally much less than on an individual loan.

Bank USA has fixed-rate assets of $50 million funded by fixed-rate liabilities of 75 million Euros paying an interest rate of 10 percent annually.Bank Dresdner has fixed-rate assets of €75 million funded by fixed-rate liabilities of $50 million paying an interest rate of 10 percent annually.The current exchange rate is €1.50/$.They agree to swap interest payments on their liabilities to hedge against currency risk exposure for two years. At the end of the year 2, the exchange rate is €1/$.What are the losses and gains to each bank as a result of this swap.Ignore principal payments and compare it to the scenario where it did not engage in the swap.

If a US bank has variable-rate assets in US dollars and fixed-rate liabilities in Euros, the bank is exposed to

Swaps generally have a shorter maturity or contract life than other derivative instruments.

A pure credit swap will reduce interest rate risk.

A swap that often involves an up-front fee or payment as compensation for nonstandard terms is