Exam 24: Swaps

Once a fixed-floating interest rate swap agreement has been negotiated under no-arbitrage conditions, both parties to the swap agreement know with certainty the exact amount of their respective cash flows.

A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into

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 credit union variable-rate liabilities are CDs indexed to some domestic rate. Which of the following statements describes the hedge characteristics of the above example?

It is common to include

The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously issued securities.

The credit risk on swaps is considered to be

Which of the following is true of the "netting" process in the swap market?

The fastest growing type of swap is

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 terms of valuation, a 12-year interest rate swap can be can be considered in terms of

Bank Canada 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

In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities.

What is the basic reason that two counterparties enter into a swap agreement?

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

Swaps create value if