Question 1

Explain how this opportunity affects which swap firm B will be willing to participate in.

Accepted Answer

Since B can redenominate a €40

Question 2

Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined as

Accepted Answer

A) "basis risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index. 
B) "basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. 
C) "basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an opposing counterparty the other side of an interest rate swap entered into with a counterparty, and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. 
D) "basis risk" refers to the risk of fluctuating exchange rates, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index. 
A) "basis risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index. 
B) "basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. 
C) "basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an opposing counterparty the other side of an interest rate swap entered into with a counterparty, and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. 
D) "basis risk" refers to the risk of fluctuating exchange rates, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index.

Question 3

You are the debt manager for a U.S.-based multinational.You need to borrow €100,000,000 for five years.You can either borrow the €100,000,000 directly in Germany or borrow dollars in the U.S.and enter into a combined interest rate and currency swap with a swap bank.One risk that you face by using the swap that you do not face by borrowing euros directly is

Accepted Answer

A) exchange rate risk. 
B) sovereign risk. 
C) credit risk. 
D) interest rate risk. 
A) exchange rate risk. 
B) sovereign risk. 
C) credit risk. 
D) interest rate risk.

Question 4

A swap bank

Accepted Answer

A) can act as a broker, bringing together counterparties to a swap. 
B) can act as a dealer, standing ready to buy and sell swaps. 
C) both a) and b) 
D) only sometimes a) but never ever b) 
A) can act as a broker, bringing together counterparties to a swap. 
B) can act as a dealer, standing ready to buy and sell swaps. 
C) both a) and b) 
D) only sometimes a) but never ever b)

Question 5

Pricing an interest-only single currency swap after inception involves

Accepted Answer

A) sending a market order to a swap dealer. 
B) finding the difference between the present values of the payments streams the party will receive and pay. 
C) finding the sum of the present values of the payments streams that each party will receive in one currency and pay in the other currency, converted to a common currency. 
D) none of the above 
A) sending a market order to a swap dealer. 
B) finding the difference between the present values of the payments streams the party will receive and pay. 
C) finding the sum of the present values of the payments streams that each party will receive in one currency and pay in the other currency, converted to a common currency. 
D) none of the above

Question 6

Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and promise to make at least 20bp for your firm.

Accepted Answer

The answer of Act as a swap bank and quote...

Question 7

A swap bank makes the following quotes for 5-year swaps and AAA-rated firms:

Accepted Answer

A) The bank stands ready to pay $5.2% against receiving dollar LIBOR on 5-year loans. 
B) The bank stands ready to receive €7% against receiving dollar LIBOR on 5-year loans. 
C) The bank stands ready to pay €7% against receiving dollar LIBOR on 5-year loans. 
D) None of the above 
A) The bank stands ready to pay $5.2% against receiving dollar LIBOR on 5-year loans. 
B) The bank stands ready to receive €7% against receiving dollar LIBOR on 5-year loans. 
C) The bank stands ready to pay €7% against receiving dollar LIBOR on 5-year loans. 
D) None of the above

Question 8

Suppose that the swap that you proposed in question 2 is now 4 years old (i.e.there is exactly one year to go on the swap).The fourth payment has already been made.If the spot exchange rate prevailing in year 4 is $1.8778 = €1 and the 1-year forward exchange rate prevailing in year 4 is $1.95 = €1,what is the value of the swap to the party paying dollars? If the swap were initiated today the correct rates would be as shown:

Accepted Answer

The answer of Suppose that the swap that you proposed...

Question 9

Which combination of the following statements is true about a swap bank?

Accepted Answer

A) (i) and (ii) 
B) (i), (ii) and (iii) 
C) (i), (ii), (iii) and (iv) 
D) (i), (ii), (iii), (iv) and (v) 
A) (i) and (ii) 
B) (i), (ii) and (iii) 
C) (i), (ii), (iii) and (iv) 
D) (i), (ii), (iii), (iv) and (v)

Question 10

Explain how this opportunity affects which swap firm A will be willing to participate in.

Accepted Answer

Since A can redenominate a $60

Question 11

A major risk faced by a swap dealer is credit risk.This is

Accepted Answer

A) the probability that a counterparty will default. 
B) the probability that both counterparties default. 
C) the probability floating rates will move against the dealer. 
D) none of the above 
A) the probability that a counterparty will default. 
B) the probability that both counterparties default. 
C) the probability floating rates will move against the dealer. 
D) none of the above

Question 12

In the swap market,which position potentially carries greater risks,broker or dealer?

Accepted Answer

A) Broker 
B) Dealer 
C) They are the same swaps, therefore the same risks. 
A) Broker 
B) Dealer 
C) They are the same swaps, therefore the same risks.

Question 13

With regard to a swap bank acting as a dealer in swap transactions,mismatch risk refers to

Accepted Answer

A) The risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index. 
B) The risk that interest rates changing unfavorably before the sap bank can lay off to an opposing counterparty on the other side of an interest rate swap entered into with the first counterparty. 
C) The risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay off a swap it undertakes with one counterparty with an opposing transaction. 
D) The risk that it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed to take. 
A) The risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index. 
B) The risk that interest rates changing unfavorably before the sap bank can lay off to an opposing counterparty on the other side of an interest rate swap entered into with the first counterparty. 
C) The risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay off a swap it undertakes with one counterparty with an opposing transaction. 
D) The risk that it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed to take.

Question 14

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below:   A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%. What is the value of this swap to company X?

Accepted Answer

A) Company X will lose money on the deal. 
B) Company X will save 25 basis points per year on $10,000,000 = $25,000 per year. 
C) Company X will only break even on the deal. 
D) Company X will save 5 basis points per year on $10,000,000 = $5,000 per year. 
A) Company X will lose money on the deal. 
B) Company X will save 25 basis points per year on $10,000,000 = $25,000 per year. 
C) Company X will only break even on the deal. 
D) Company X will save 5 basis points per year on $10,000,000 = $5,000 per year.

Question 15

Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow £5,000,000 fixed for 1 year.The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as $2.00*(1.08)/£1.00*(1.06)= $2.0377/£1.Their external borrowing opportunities are:  
 A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap.In order for X and Y to be interested,they can face no exchange rate risk  
 What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y?

Accepted Answer

A) A = £7%; B = $9%. 
B) A = $8%; B = £6%. 
C) A = $7%; B = £7%. 
D) A = $8%; B = £8%. 
A) A = £7%; B = $9%. 
B) A = $8%; B = £6%. 
C) A = $7%; B = £7%. 
D) A = $8%; B = £8%.

Question 16

Show how your proposed swap would work for firm
A.(e.g.if you were acting as an agent for the swap bank, try to "sell" firm A on your swap)
I would point out that his contracting costs would be less with just having 1 swap instead of 2 forward contracts.Also, he might be able to get a better rate through the swap if he can't find forward contracts at his desired maturity and amounts.

Accepted Answer

I would point out that his contracting c

Question 17

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below:   A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 10.05%.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%.   What is the value of this swap to the swap bank?

Accepted Answer

A) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. 
B) The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year. 
C) The swap bank will LOSE money. 
D) None of the above 
A) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. 
B) The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year. 
C) The swap bank will LOSE money. 
D) None of the above

Question 18

Suppose that you are a swap bank and you notice that interest rates on coupon bonds are as shown.Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR.The current spot exchange rate is $1.50 per €1.00.The size of the swap is €40 million versus $60 million.   In other words,what will you be willing to pay in euro against receiving USD LIBOR?

Accepted Answer

A) 7% 
B) 6% 
C) 5% 
D) None of the above 
A) 7% 
B) 6% 
C) 5% 
D) None of the above

Question 19

A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has agreed to one leg of the swap but company Y is "playing hard to get".

Accepted Answer

A) The swap bank could just sell the company X side of the swap. 
B) Company X should lobby Y to "get on board". 
C) Company Y should calculate the QSD and subtract that from their best outside offer. 
D) None of the above 
A) The swap bank could just sell the company X side of the swap. 
B) Company X should lobby Y to "get on board". 
C) Company Y should calculate the QSD and subtract that from their best outside offer. 
D) None of the above

Question 20

Explain how this opportunity affects which swap firm B will be willing to participate in.

Accepted Answer

Since B can redenominate a £30

Explain how this opportunity affects which swap firm B will be willing to participate in.

Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined as

A swap bank

Pricing an interest-only single currency swap after inception involves

Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and promise to make at least 20bp for your firm.

A swap bank makes the following quotes for 5-year swaps and AAA-rated firms:

Which combination of the following statements is true about a swap bank?

Explain how this opportunity affects which swap firm A will be willing to participate in.

A major risk faced by a swap dealer is credit risk.This is

In the swap market,which position potentially carries greater risks,broker or dealer?

With regard to a swap bank acting as a dealer in swap transactions,mismatch risk refers to

A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has agreed to one leg of the swap but company Y is "playing hard to get".

Explain how this opportunity affects which swap firm B will be willing to participate in.

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

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Exam 14: Interest Rate and Currency Swaps

Explain how this opportunity affects which swap firm B will be willing to participate in.

Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined as

A swap bank

Pricing an interest-only single currency swap after inception involves

Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and promise to make at least 20bp for your firm.

A swap bank makes the following quotes for 5-year swaps and AAA-rated firms:

Which combination of the following statements is true about a swap bank?

Explain how this opportunity affects which swap firm A will be willing to participate in.

A major risk faced by a swap dealer is credit risk.This is

In the swap market,which position potentially carries greater risks,broker or dealer?

With regard to a swap bank acting as a dealer in swap transactions,mismatch risk refers to

A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has agreed to one leg of the swap but company Y is "playing hard to get".

Explain how this opportunity affects which swap firm B will be willing to participate in.

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters