Exam 15: Interest Rate and Currency Swaps

Some of the world's largest and most financially sound firms may borrow at variable rates less than LIBOR.

TABLE 15.2 Use the information to answer following question(s). -Refer to Table 15.2. For a swap agreement structured by Barclay's to benefit both Shell and Merck, which of the following must be true?

A swap agreement may involve currencies or interest rates, but never both.

Graham Investments must pay floating rate interest 6 months from now. The firm can lock in the rate by buying an interest rate futures contract. Interest rate futures for 6 months from today are currently settled at 95.03 for a yield of 4.97% per annum. If the floating interest rate 6 months from now is 6%, how much did Graham gain or lose?

TABLE 15.1 Use the information for Polaris Corporation to answer following question(s). Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00% -Refer Table 15.1. If the LIBOR rate falls to 3.00% after the first year what will be the all-in-cost (i.e. the internal rate of return) for Polaris for the entire loan?

Which of the following would be considered an example of a currency swap?

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to

Instruction 15.1: For following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. -Refer to Instruction 15.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 is (Assume your firm is borrowing money.)

Instruction 15.1: For following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. -Refer to Instruction 15.1. After the fact, under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.)

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could

The largest amount of daily trading in the foreign exchange derivatives market occurs in which of the following types of securities?

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

Historically, interest rate movements have shown less variability and greater stability than exchange rate movements.

Instruction 15.1: For following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. -Refer to Instruction 15.1. After the fact, under which set of circumstances would you prefer strategy #2? (Assume your firm is borrowing money.)

A combined position of selling one currency forward at one maturity while buying the same currency forward at a different maturity to lock in a future interest rate in the foreign currency is a/an

A basis point is one-tenth of one percent.

Counterparty risk is

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an ________.

Instruction 15.1: For following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. -Refer to Instruction 15.1. Which strategy (strategies) will eliminate credit risk?

Molson Brewery, a Canadian company wishes to borrow $1,000,000 for 12 weeks. A rate of 6.00% per annum is quoted by lenders in both New York and London using, respectively, international and British definitions of interest. From which source should Molson borrow other things equal? What is Molson's total interest charge from the selected source?