Exam 30: OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

An interest rate agreement is an agreement between two parties in which one party, for an upfront premium, agrees to compensate the other if the reference rate is the same as the strike rate.

The predetermined level of the reference interest rate is called the ________.

While the initial motivation for the swap market was borrower exploitation of what were perceived to be credit arbitrage opportunities, such opportunities are limited and depend on the presence of market imperfections.

Which of the below statements is FALSE?

________ is an agreement between two parties in which one party, for an upfront premium, agrees to compensate the other if a designated interest rate, called the reference rate, is different from a predetermined level.

A ________ involves the sale of the swap to the original counterparty.

Swaps can be used by investment bankers to create a security.

Illustrate an interest rate / equity swap.

A ceiling is created by buying an interest rate cap and selling an interest rate floor.

Assume the following terms for an FRA: Reference rate is three-month LIBOR, the contract rate is 5.78%, the notional amount is for $10 million, and the number of days to settlement is 91 days. If the settlement rate is 6.33%, what compensation or payment must make to the buyer by the seller?

In an interest rate swap, the dollar amount each counterparty pays to the other is the agreed-upon periodic interest rate times the ________.

The agreement is referred to as an ________ when one party agrees to pay the other if the reference rate falls below a predetermined level.

The FRA's ________ is the rate specified in the FRA at which the buyer of the FRA agrees to pay for funds and the seller of the FRA agrees to receive for investing funds.

In addition to the generic swap structure where one party pays fixed and the other floating, there are swaps with varying notional principal amounts, basis swaps (floating payments made by both parties), constant maturity swaps, swaptions, and forward start swaps.

Which of the below statements is FALSE?

A position in an interest rate swap can be interpreted as a position in a package of forward contracts but not in a package of cash flows from buying and selling cash market instruments.

What is forward start swap?

While an interest rate swap may be nothing more than a package of forward contracts, several important reasons suggest that it is not a redundant contract. Which of the below is NOT one of these?

When one party agrees to pay the other if the reference rate exceeds a predetermined level, the agreement is referred to as ________.

The value of an interest rate swap will fluctuate with ________.