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

Ossie 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 Battler Ltd.Based on the following data for the two companies,in which interest rate market will Ossie Ltd borrow,and swap into? Ossie Ltd fixed rate 10.8\% per annum; floating rate BBSW +0.3\% per annum Battler Ltd fixed rate 11.5\% per annum; floating rate BBSW +1.7\% per annum

An interest rate swap may be used by a company only able to borrow variable rate funds to obtain favourable longer term funding from otherwise difficult to access long-term debt markets.

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

An investment bank is to advise two client companies on the establishment of a mutually beneficial swap facility.Both companies are able to access funding within the fixed interest rate debt markets and the floating interest rate debt markets.However,company X has a comparative advantage over company Y within one of the debt markets.Based on the following data,what is the comparative advantage of company X? Company X: Fixed rate 10.8% per annum; floating rate BBSW+ .3% per annum Company Y: Fixed rate 11.5% per annum; floating rate BBSW+1.7% per annum

The two parties contracting to exchange their respective interest payments in an interest rate swap are formally called:

One hundred basis points equal:

Cash settlement for a credit default swap (CDS)means the:

Which of the following statements regarding interest rate swaps is incorrect?

In a swap arrangement,both parties may be able to receive more favourable funding rates than they would have done without the swap,and the swap dealer receives a spread as well.Where does the cost saving originate from?

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. Which of the following are correct?

A rise in LIBOR will benefit the fixed-rate borrowing party in an interest-rate swap contract.

The growth of the interest rate swaps market has been due to firms wanting to:

For the majority of interest rate swaps,an intermediary is involved.

Consider the following five statements: i.Swaps may be used to achieve a lower cost of funds for a company. ii.In an interest rate swap,the two parties swap the principal amount plus the ongoing associated interest obligations. iii.An intermediated swap is said to be 'matched' when a bank enters into swaps with both firms involved in an interest rate swap iv.A 'plain vanilla' swap is the fixed AUD to floating AUD swap. v.If an intermediary is involved in a swap between two parties,the intermediary will also provide the initial loan to both parties. Which of the following are correct?

When two parties exchange their respective interest payments associated with existing debt borrowed in the capital markets,this is called a/an:

In a vanilla interest rate swap: