Exam 24: Swaps

A Canadian 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. What is the nominal payment paid or received by the Canadian bank over the three year period?

A credit union 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 credit union 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?

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.

An existing swap can be effectively hedged against interest rate risk by

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

A credit union 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 credit union 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 cost of funds for the bank if the cash market liabilities are included in the analysis?

The U.S. Commodity Futures Trading Commission (CFTC) has jurisdiction over swaps in the United States.

Policies established by The International Swaps and Derivatives Association (ISDA) forbid swap contracts to be made between parties of different credit standing.

A pure credit swap is similar to buying credit insurance.

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 largest segment of the global swap market is the currency swap market.

A pure credit swap will reduce interest rate risk.

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

Credit risk is more likely to lead to failure of an FI than either interest rate or foreign-exchange risk.

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

Which of the following is NOT a reason that a swap may have less credit risk than an individual loan?

When compared to swap and option contracts, credit risk exposure is greatest with a futures contract.

The secondary market for the trading of swaps is second in liquidity to the U.S. T-bill market.

In recent years, the fastest growing type of swap agreement has been a fixed-fixed currency swap.

Which of the following is the primary sellers of credit risk protection?