Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. $\begin{array}{lccc} \text { Zero Rates } & 1 \text {-year } & \text { 2-year } & 3 \text {-year } \\ \text { USD } & \$ 3 \% & \$ 4 \% & \$ 5 \% \\ \text { Euro } & € 2 \% & € 3 \% & € 4 \% \end{array}$ In other words,what will you be willing to pay in euro against receiving USD LIBOR?

A) 5 percent B) 4 percent C) 3 percent D) 2 percent A) 5 percent B) 4 percent C) 3 percent D) 2 percent

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings. \[\begin{array} { l l l } & \$ & £ \\ \text { A } & \$ 6 \% & £5 \% \\ B & \$7 \% & £ 4\% \end{array}\] The IRP 1-year and 2-year forward exchange rates are $F _ { 1 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) }$ = $\frac { \$ 2.0385 } { £ 1.00 }$ $F _ { 2 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } }$ = $\frac { \$ 2.0777 } { £ 1.00 }$ USD pounds \[\begin{array} { c c c c } \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask } \\ 6\% & 6.1 \% & 4 \%& 4 .1\% \end{array}\] Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk.

Firm B could agree to a swap at the poun

Exam 14: Interest Rate and Currency Swaps

XYZ Corporation enters into a 6-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed-rate of 9 percent annually on a notional amount of SFr10,000,000 and receive LIBOR −½ percent.As of the third reset date (i.e.,midway through the 6-year agreement),calculate the price of the swap,assuming that the fixed-rate at which XYZ can borrow has increased to 10 percent.

(Multiple Choice)

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Question 81

Which combination of the following represent the risks that a swap dealer confronts. (i)interest rate risk (ii)basis risk (iii)exchange rate risk (iv)political risk (v)sovereign risk

(Multiple Choice)

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Question 82

Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. Zero Rates 1 -year 2-year 3 -year USD \ 3\% \ 4\% \ 5\% Euro 2\% 3\% 4\% In other words,what will you be willing to pay in euro against receiving USD LIBOR?

(Multiple Choice)

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Question 83

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 here: Fixed-Rate Floating-Rate Borrowing Cost Bortowing Cost Compary X 10\% LIBOR Compary Y 12\% LIBOR +1.5\% Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for; A = Company X's external borrowing rate B = Company Y's payment to X (rate)C = Company X's payment to Y (rate)D = Company Y's external borrowing rate $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 here: \begin{array} { c c c } & \text { Fixed-Rate } & \text { Floating-Rate } \\ &\text { Borrowing Cost } & \text { Bortowing Cost } \\ \text { Compary X } & 10 \% & \text { LIBOR } \\ \text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \% \end{array} Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for; A = Company X's external borrowing rate B = Company Y's payment to X (rate)C = Company X's payment to Y (rate)D = Company Y's external borrowing rate A.A = 10%; B = 11.75%; C = LIBOR - .25%; D = LIBOR + 1.5% B.A = 10%; B = 10%; C = LIBOR - .25%; D = LIBOR + 1.5% C.A = LIBOR; B = 10%; C = LIBOR - .25%; D = 12% D.A = LIBOR; B = LIBOR; C = LIBOR - .25%; D = 12%$ A.A = 10%; B = 11.75%; C = LIBOR - .25%; D = LIBOR + 1.5% B.A = 10%; B = 10%; C = LIBOR - .25%; D = LIBOR + 1.5% C.A = LIBOR; B = 10%; C = LIBOR - .25%; D = 12% D.A = LIBOR; B = LIBOR; C = LIBOR - .25%; D = 12%

(Multiple Choice)

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Question 84

A major risk faced by a swap dealer is exchange rate risk.This is

(Multiple Choice)

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Question 85

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings. \ £ A \ 6\% £5\% B \7 \% £4\% The IRP 1-year and 2-year forward exchange rates are $F _ { 1 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) }$ = $\frac { \$ 2.0385 } { £ 1.00 }$ $F _ { 2 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } }$ = $\frac { \$ 2.0777 } { £ 1.00 }$ USD pounds Bid Ask Bid Ask 6\% 6.1\% 4\% 4.1\% Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk.

(Essay)

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Question 86

Suppose that the swap that you proposed is now 4 years old (i.e.,there is exactly one year to go on the swap).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.

(Essay)

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Question 87

Consider the situation of firm A and firm B.The current exchange rate is $1.50/€.Firm A is a U.S.MNC and wants to borrow €40 million for 2 years.Firm B is a French MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown; both firms have AAA credit ratings. \ A \ 7\% 6\% B \8 \% 5\% If firm B could use the forward exchange markets to redenominate a 2-year €40m 5 percent euro loan into a 2-year USD-denominated loan,what would be the interest rate?

(Essay)

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Question 88

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 here: Fixed-Rate Floating-Rate Borrowing Cost Bortowing Cost Compary X 10\% LIBOR Compary Y 12\% LIBOR +1.5\% 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 percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR ? 0.15 percent. $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 here: \begin{array} { c c c } & \text { Fixed-Rate } & \text { Floating-Rate } \\ &\text { Borrowing Cost } & \text { Bortowing Cost } \\ \text { Compary X } & 10 \% & \text { LIBOR } \\ \text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \% \end{array} 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 percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR ? 0.15 percent. What is the value of this swap to the swap bank?$ What is the value of this swap to the swap bank?

(Multiple Choice)

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Question 89

Consider a plain vanilla interest rate swap.Firm A can borrow at 8 percent fixed or can borrow floating at LIBOR.Firm B is somewhat less creditworthy and can borrow at 10 percent fixed or can borrow floating at LIBOR + 1 percent.Eun wants to borrow floating and Resnick prefers to borrow fixed.Both corporations wish to borrow $10 million for 5 years.Which of the following swaps is mutually beneficial to each party and meets their financing needs?

(Multiple Choice)

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Question 90

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings. \ £ A \ 6\% £5\% B \7 \% £4\% The IRP 1-year and 2-year forward exchange rates are $F _ { 1 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) }$ = $\frac { \$ 2.0385 } { £ 1.00 }$ $F _ { 2 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } }$ = $\frac { \$ 2.0777 } { £ 1.00 }$ USD pounds Bid Ask Bid Ask 6\% 6.1\% 4\% 4.1\% Explain how this opportunity affects which swap firm A will be willing to participate in.

(Essay)

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Question 91

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow £5,000,000 fixed for 5 years.The exchange rate is $2 = £1 and is not expected to change over the next 5 years.Their external borrowing opportunities are \Bortowing £ Borrowing Cost Cost Compary X \ 10\% £10.5\% Compary Y \ 12\% £13\% 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. $Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow £5,000,000 fixed for 5 years.The exchange rate is $2 = £1 and is not expected to change over the next 5 years.Their external borrowing opportunities are \begin{array} { c c c } & \text { \$Bortowing } & \text { £ Borrowing } \\ & \text { Cost } & \text { Cost } \\ \text { Compary X } & \$ 10 \% & £ 10.5 \% \\ \text { Compary Y } & \$ 12 \% & £ 13 \% \end{array} A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap.In order for X and Y to be interested,they can face no exchange rate risk. What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y?$ 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?

(Multiple Choice)

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Question 92

Consider the dollar- and euro-based borrowing opportunities of companies A and B. borrowing \ borrowing 7\% \ 8\% 6\% \ 9\% A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as $2.00 × (1.08)/€1.00 × (1.06)= $2.0377/€1. Is there a mutually beneficial swap?

(Multiple Choice)

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Question 93

Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has a AAA credit rating,but company Y's credit standing is considerably lower.

(Multiple Choice)

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Question 94

When a swap bank serves as a broker,

(Multiple Choice)

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Question 95

Nominal differences in currency swaps

(Multiple Choice)

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Question 96

Pricing an interest-only single currency swap after inception involves

(Multiple Choice)

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Question 97

Floating-for-floating currency swaps

(Multiple Choice)

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Question 98

Which combination of the following statements is true about a swap bank? (i)it is a generic term to describe a financial institution that facilitates swaps between counterparties (ii)it can be an international commercial bank (iii)it can be an investment bank (iv)it can be a merchant bank (v)it can be an independent operator

(Multiple Choice)

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Question 99

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

(Multiple Choice)

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Question 100

Showing 81 - 100 of 100

Which combination of the following represent the risks that a swap dealer confronts. (i)interest rate risk (ii)basis risk (iii)exchange rate risk (iv)political risk (v)sovereign risk

A major risk faced by a swap dealer is exchange rate risk.This is

Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has a AAA credit rating,but company Y's credit standing is considerably lower.

When a swap bank serves as a broker,

Nominal differences in currency swaps

Pricing an interest-only single currency swap after inception involves

Floating-for-floating currency swaps

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