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

Exam 14: Interest Rate and Currency Swaps

Consider the borrowing rates for Parties A and B.A wants to finance a $100,000,000 project at a FIXED rate.B wants to finance a $100,000,000 project at a FLOATING rate.Both firms want the same maturity,in 5 years. Firm Fixed Rate Floating \ 10.3\% Prime +1\% \ 8.9\% Prime +1/2\% Construct a mutually beneficial INTEREST ONLY swap that makes money for A,B,and the swap bank IN EQUAL MEASURE.

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Question 41

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

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Question 42

Amortizing currency swaps

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Question 43

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. \ £ \ 6\% £5\% \ 7\% £4\% The IRP 1-year and 2-year forward exchange rates are (\ \mid£)== (\ \mid£)== $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 $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA credit ratings. \begin{array} { c | c c } & \$ & £ \\ \hline \mathrm { A } & \$ 6 \% & £ 5 \% \\ \mathrm {~B} & \$ 7 \% & £ 4 \% \end{array} The IRP 1-year and 2-year forward exchange rates are \begin{array} { l } F _ { 1 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) } = \frac { \$ 2.0385 } { £ 1.00 } \\ F _ { 2 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } } = \frac { \$ 2.0777 } { £ 1.00 } \end{array} -Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.$ -Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided. $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 $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA credit ratings. \begin{array} { c | c c } & \$ & £ \\ \hline \mathrm { A } & \$ 6 \% & £ 5 \% \\ \mathrm {~B} & \$ 7 \% & £ 4 \% \end{array} The IRP 1-year and 2-year forward exchange rates are \begin{array} { l } F _ { 1 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) } = \frac { \$ 2.0385 } { £ 1.00 } \\ F _ { 2 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } } = \frac { \$ 2.0777 } { £ 1.00 } \end{array} -Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.$

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Question 44

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).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: 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.

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Question 45

Find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent.

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Question 46

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:

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Question 47

What are the IRP 1-year and 2-year forward exchange rates?

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Question 48

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

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Question 49

A swap bank

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Question 50

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

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Question 51

Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 7% USD loan into a 2-year euro denominated loan.

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Question 52

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent in dollars and 6.60-6.80 percent in euro against six-month dollar LIBOR.This means

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Question 53

FOR YOUR SWAP (the one you have shown above)how would the swap bank quote the swap against prime? (Hint: they are quoting a bid-ask spread against "flat" prime.)

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Question 54

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: Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Company X 10\% LIBOR Company 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%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%.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%. $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: \begin{array} { l c l } & \begin{array} { l } \text { Fixed-Rate Borrowing } \\ \text { Cost } \end{array} & \begin{array} { l } \text { Floating-Rate } \\ \text { Borrowing Cost } \end{array} \\ \hline \text { Company X } & 10 \% & \text { LIBOR } \\ \text { Company 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%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%.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 $10,000,000 with the coupon rate of LIBOR - 0.15%. What is the value of this swap to the swap bank?$ What is the value of this swap to the swap bank?

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Question 55

What would be the interest rate?

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Question 56

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

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Question 57

Consider a plain vanilla interest rate swap.Firm A can borrow at 8% fixed or can borrow floating at LIBOR.Firm B is somewhat less creditworthy and can borrow at 10% fixed or can borrow floating at LIBOR + 1%.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?

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Question 58

In an interest-only currency swap

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Question 59

Suppose ABC Investment Banker,Ltd.is quoting swap rates as follows: 7.50 - 7.85 annually against six-month dollar LIBOR for dollars,and 11.00 - 11.30 percent annually against six-month dollar LIBOR for British pound sterling.ABC would enter into a $/£ currency swap in which: Refer To: 14-21

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Question 60

Showing 41 - 60 of 95

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

Amortizing currency swaps

Find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent.

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:

What are the IRP 1-year and 2-year forward exchange rates?

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

A swap bank

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 7% USD loan into a 2-year euro denominated loan.

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent in dollars and 6.60-6.80 percent in euro against six-month dollar LIBOR.This means

FOR YOUR SWAP (the one you have shown above)how would the swap bank quote the swap against prime? (Hint: they are quoting a bid-ask spread against "flat" prime.)

What would be the interest rate?

In an interest-only currency swap

Suppose ABC Investment Banker,Ltd.is quoting swap rates as follows: 7.50 - 7.85 annually against six-month dollar LIBOR for dollars,and 11.00 - 11.30 percent annually against six-month dollar LIBOR for British pound sterling.ABC would enter into a $/£ currency swap in which: Refer To: 14-21

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Corporate Governance Around the World

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International Parity Relationships and Forecasting Foreign Exchange Rates

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