Question 1

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 2

When a swap bank serves as a dealer:

Accepted Answer

A) The swap bank stands willing to accept either side of a swap. 
B) The swap bank matches counterparties but does not assume any risk of the swap. 
C) The swap bank receives a commission for matching buyers and sellers. 
D) None of the above 
A) The swap bank stands willing to accept either side of a swap. 
B) The swap bank matches counterparties but does not assume any risk of the swap. 
C) The swap bank receives a commission for matching buyers and sellers. 
D) None of the above

Question 3

Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

Accepted Answer

The answer of Devise a direct swap for A and...

Question 4

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

Accepted Answer

A) the probability that a foreign counterparty will default in a currency swap. 
B) the probability that either counterparty defaults in a currency swap. 
C) the probability exchange rates will move against the dealer. 
D) none of the above 
A) the probability that a foreign counterparty will default in a currency swap. 
B) the probability that either counterparty defaults in a currency swap. 
C) the probability exchange rates will move against the dealer. 
D) none of the above

Question 5

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. $$\begin{array} { c | c c } 
& \$ & £ \
\hline \mathrm { A } & \$ 6 \% & £ 5 \% \
\mathrm {~B} & \$ 7 \% & £ 4 \%
\end{array}$$
-Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan.

Accepted Answer

Firm A could borrow $60m today and excha

Question 6

Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

Accepted Answer

The answer of Devise a direct swap for A and...

Question 7

When a swap bank serves as a broker:

Accepted Answer

A) The swap bank stands willing to accept either side of a swap. 
B) The swap bank matches counterparties but does not assume any risk of the swap. 
C) The swap bank receives a commission for matching buyers and sellers. 
D) None of the above 
A) The swap bank stands willing to accept either side of a swap. 
B) The swap bank matches counterparties but does not assume any risk of the swap. 
C) The swap bank receives a commission for matching buyers and sellers. 
D) None of the above

Question 8

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. $$\begin{array} { c | c c } 
& \$ & £ \
\hline \mathrm { A } & \$ 6 \% & £ 5 \% \
\mathrm {~B} & \$ 7 \% & £ 4 \%
\end{array}$$ The IRP 1-year and 2-year forward exchange rates are $$\begin{array} { l } 
F _ { 1 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) } = \frac { \$ 2.0385 } { £ 1.00 } \
F _ { 2 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } } = \frac { \$ 2.0777 } { £ 1.00 }
\end{array}$$  
-Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4% pound sterling loan into a 2-year USD-denominated loan.

Accepted Answer

Firm B could borrow £30m today and excha

Question 9

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: $$\begin{array} { l l l } 
& \text { Fixed-Rate Borrowing } & \text { Floating-Rate } \
& \text { Cost } & \text { Borrowing Cost } \
\hline \text { Company X } & 10 \% & \text { LIBOR } \
\text { Company Y } & 12 \% & \text { LIBOR } + 1.5 \%
\end{array}$$ 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

Accepted Answer

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%

Question 10

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 11

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 12

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 13

Swaps are said to offer market completeness

Accepted Answer

A) This means that all types of debt instruments are not regularly available for all borrowers.Thus interest rate swap markets assist in tailoring financing to the type desired by a particular borrower. 
B) In that the swap market offers price discovery to the market. 
C) Because you can trade across both currencies and fixed and floating market segments. 
D) None of the above 
A) This means that all types of debt instruments are not regularly available for all borrowers.Thus interest rate swap markets assist in tailoring financing to the type desired by a particular borrower. 
B) In that the swap market offers price discovery to the market. 
C) Because you can trade across both currencies and fixed and floating market segments. 
D) None of the above

Question 14

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. $$\begin{array} { c | c c } 
& \$ & £ \
\hline \mathrm { A } & \$ 6 \% & £ 5 \% \
\mathrm {~B} & \$ 7 \% & £ 4 \%
\end{array}$$
-Explain how this opportunity affects which swap firm B will be willing to participate in.

Accepted Answer

Since B can redenominate a £30

Question 15

The term interest rate swap

Accepted Answer

A) refers to a "single-currency interest rate swap" shortened to "interest rate swap". 
B) involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals. 
C) can be "fixed-for-floating rate" or "fixed-for-fixed rate". 
D) all of the above 
A) refers to a "single-currency interest rate swap" shortened to "interest rate swap". 
B) involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals. 
C) can be "fixed-for-floating rate" or "fixed-for-fixed rate". 
D) all of the above

Question 16

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 17

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

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 18

Floating for floating currency swaps

Accepted Answer

A) the reference rates are different for the different currencies: e.g.dollar LIBOR versus euro LIBOR. 
B) do not exist. 
C) offer the swap bank a built-in hedge. 
D) none of the above 
A) the reference rates are different for the different currencies: e.g.dollar LIBOR versus euro LIBOR. 
B) do not exist. 
C) offer the swap bank a built-in hedge. 
D) none of the above

Question 19

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. $$\begin{array} { c | c c } 
& \$ & £ \
\hline \mathrm { A } & \$ 6 \% & £ 5 \% \
\mathrm {~B} & \$ 7 \% & £ 4 \%
\end{array}$$ The IRP 1-year and 2-year forward exchange rates are $$\begin{array} { l } 
F _ { 1 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) } = \frac { \$ 2.0385 } { £ 1.00 } \
F _ { 2 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } } = \frac { \$ 2.0777 } { £ 1.00 }
\end{array}$$  
-Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk.

Accepted Answer

Firm B could agree to a swap at the poun

Question 20

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.mid-way 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%.

Accepted Answer

A) SFr248,685 
B) SFr900,000 
C) SFr2,700,000 
D) SFr7,300,000 
A) SFr248,685 
B) SFr900,000 
C) SFr2,700,000 
D) SFr7,300,000

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

When a swap bank serves as a dealer:

Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

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

Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

When a swap bank serves as a broker:

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".

Swaps are said to offer market completeness

The term interest rate swap

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.

Floating for floating currency swaps

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

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

When a swap bank serves as a dealer:

Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

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

Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

When a swap bank serves as a broker:

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".

Swaps are said to offer market completeness

The term interest rate swap

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.

Floating for floating currency swaps

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