Exam 21: Swaps and Floating Rate Products

Firm A can borrow at 4% fixed or at Libor flat in the fixed and floating rate markets,respectively.Firm B can borrow at 7% fixed or Libor plus 100 bps in the fixed and floating rate markets,respectively.A wants to borrow floating and B wants to borrow fixed. If A borrows fixed and B borrows floating and they enter into a fixed-for-Libor interest-rate swap in which A pays Libor flat,what is the range of fixed rates for B that enables each firm to improve its financing costs (compared to accessing financing in the market directly)?

Suppose Libor caps and floors at the same strike rate are unequal in price.Suppose that,ceteris paribus,there is a sudden increase in interest-rate volatility.Which of the following statements is valid?

Consider a one-year maturity caplet on underlying six-month Libor at a strike rate of 6%.If the forward rate is lognormal with volatility $\sigma = 0.10$ ,and the one-year spot rate is 5%,what is the price of a $100,000-notional caplet if the (1,1.5)-year forward rate is 6%?

A plain vanilla interest-rate swap is an agreement to exchange a series of periodic payments,one computed at a fixed rate and the other at

You enter into a $100 million notional swap to pay six-month Libor and receive 8%.Payment dates are semi-annual on both legs.The last payment date was March 25 and the next payment date is September 25.Floating payments are based on the USD money-market convention,and fixed payments are based on the 30/360 convention.If the net payment you will receive on September 25 is zero,what must have been the Libor reset on march 25?

The main difference between the "short-form" and "forward" methods of pricing a floating-rate note is:

Who is likely to bear the greater counterparty risk in a swap where A pays fixed and B pays floating if interest rates are expected to rise over the life of the swap?

The UK money-market day-count convention is

Consider a one-year caplet on underlying six-month Libor at a strike rate of 6%.If the corresponding floorlet is equal to the caplet in price,what is the current forward rate for the period (1,1.5)years?

Choose the most appropriate of the following alternatives: an off-market swap is one where the fixed rate in the swap is

The US and euro-zone day-count convention for a floating-rate note (based on Libor and Euribor,respectively)is

The 4%-strike six-month Libor-based two-year cap and floor are trading at $2.30 and $2.55,respectively.Assume that the cap has 4 caplets maturing in 6 months,1 year,18 months,and 24 months,respectively,and that the floor similarly has 4 floorlets.What is the NPV at inception of a two-year swap in which you are paying Libor versus receiving 4%?

You enter into a $100 million notional swap to pay six-month Libor and receive 8%.Payment dates are semi-annual on both legs.The last payment date was March 25 and the next payment date is September 25.Floating payments are based on the USD money-market convention,and fixed payments are based on the 30/360 convention.If the floating rate was reset to 6% on March 25,what is the net amount you will receive on September 25?

You have the view that rates will be rising over time.What is thebest kind of swap to exploit this view from among the following alternatives?