Exam 21: Interest Rate Swaps, Cross-Currency Swaps and Credit Default

Discuss the use of interest rate swaps in hedging interest rate exposure.

When a firm has borrowed floating rate from a bank but at the same time has entered into a fixed-price contract to manufacture goods,a fixed rate to variable rate swap allows the firm to lock in its profit margin on goods manufactured if interest rates rise.

Consider these five statements: i.Swaps can be used to create a synthetic floating rate debt for a company's fixed rate debt. ii.If an intermediary has arranged a matched swap,it has no net exposure to interest rate risk. iii.A cross-currency swap differs from an interest rate swap in that,for a cross-currency swap,the principals,as well as the agreed interest obligations,are swapped for the duration of the swap agreement. iv.With a cross-currency swap,the exchange rate used at the principal re-exchange date is based on the current spot rate at that time. v.If a bank acts as an intermediary in a swap and does not fund the swap parties' underlying loan facilities,it has no obligation under the bank capital adequacy requirements. How many of the statements are true and how many are false?

If a company with a fixed-rate debt of 11% enters into a swap and pays floating-rate debt of 8% and receives fixed-rate payments of 9%,its net cost of debt becomes:

As a foreign exchange hedge,cross-currency swaps have all of the following features,except:

A company is concerned that the cost of its long-term debt facilities is based on a fixed interest rate that is considerably above current market rates,and that rates will continue to fall.The company decides to use a swap to manage its risk exposure.using the data provided below,which of the following statements is incorrect? Data: Existing debt fixed interest rate: 13.50% per annum Current long-term fixed swap rate: 11.75% per annum Current long-term floating swap rate: BBSW+0.50% per annum

An interest rate swap that obligates traders to enter a swap at some date in the future,with terms agreed today,is a:

Which of the following about interest rate swaps is NOT correct?

Growth in the interest rate swaps market has occurred as a consequence of:

The advantages(s)for a company to use an interest rate swap is:

In an interest rate swap ______ gains/gain when the three-month BBSW falls.

The fictional principal on which an interest rate swap is based is called the:

In order to measure and manage interest rate swap risk exposures,a financial intermediary may:

When a bond investor buys a credit default swap (CDS),they will:

All of the following are factors that directly affect swap pricing,except:

Interest rate swaps and cross-currency swaps:

Interest rate swaps and cross-currency swaps permit a counterparty to exchange a:

The advantage of over-the-counter products such as swaps or forwards contracts,relative to exchange-traded products such as options or futures,is:

Bosie Ltd is about to establish a new funding arrangement.It is able to borrow in either the fixed-rate or floating-rate debt markets.The company wishes to lower its cost of borrowing by entering into a swap transaction with Matlock Ltd.Based on the following data for the two companies,in which interest rate market will Matlock Ltd borrow,and swap into? Bosie Ltd fixed rate 10.8\% per annum; floating rate BBSW +0.3\% per annum Matlock Ltd fixed rate 11.5\% per annum; floating rate BBSW +0.7\% per annum

Interest rate swap transactions may be used by a multinational corporation as part of a funding strategy to: