Question 1

The size of the swap market is

Accepted Answer

A) measured by notational principal. 
B) over 7 trillion dollars. 
C) both a and b 
D) none of the above 
A) measured by notational principal. 
B) over 7 trillion dollars. 
C) both a and b 
D) none of the above

Question 2

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 A could use two of the swaps offered above to hedge its exchange rate risk.

Accepted Answer

Firm A could agree to a swap at the poun

Question 3

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,a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR:   The firm's external borrowing opportunities are: $$\begin{array} { c | c c } 
& € \text { borrowing } & \text { \$ borrowing } \
\hline \mathrm { A } & € 7 \% & \$ 8 \% \
\mathrm {~B} & € 6 \% & \$ 9 \%
\end{array}$$

Accepted Answer

A) Firm A does 2 swaps with the swap bank, $ at bid and € at ask.Firm B does 2 swaps with the swap bank, $ at ask and € at bid.Firms A and B would each save 90bp and the swap bank would earn 20bp. 
B) There is no mutually beneficial swap at these prices. 
C) Firm A does 2 swaps with the swap bank, $ at ask and € at bid.Firm B does 2 swaps with the swap bank, $ at bid and € at ask.Firms A and B would each save 90bp and the swap bank would earn 20bp. 
D) None of the above 
A) Firm A does 2 swaps with the swap bank, $ at bid and € at ask.Firm B does 2 swaps with the swap bank, $ at ask and € at bid.Firms A and B would each save 90bp and the swap bank would earn 20bp. 
B) There is no mutually beneficial swap at these prices. 
C) Firm A does 2 swaps with the swap bank, $ at ask and € at bid.Firm B does 2 swaps with the swap bank, $ at bid and € at ask.Firms A and B would each save 90bp and the swap bank would earn 20bp. 
D) None of the above

Question 4

Use the following information to calculate the quality spread differential (QSD): $\begin{array}{lll} 
& \begin{array}{l}
\text { Fixed-Rate Borrowing } \
\text { Cost }
\end{array} & \begin{array}{l}
\text { Floating-Rate } \
\text { Borrowing Cost }
\end{array} \
\hline \text { Company X } & 10 \% & \text { LIBOR } \
\text { Company Y } & 12 \% & \text { LIBOR }+1.5\%
\end{array}$

Accepted Answer

A) 0.50% 
B) 1.00% 
C) 1.50% 
D) 2.00% 
A) 0.50% 
B) 1.00% 
C) 1.50% 
D) 2.00%

Question 5

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. $$\begin{array} { | l | l | l | l | } 
\hline \begin{array} { l } 
\text { Zero } \
\text { Rates }
\end{array} & 1 \text {-year } & \text { 2-year } & \text { 3-year } \
\hline \text { USD } & \$ 3 \% & \$ 4 \% & \$ 5 \% \
\hline \text { euro } & € 2 \% & € 3 \% & € 4 \% \
\hline
\end{array}$$ In other words,what will you be willing to pay in euro against receiving USD LIBOR?

Accepted Answer

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

Question 6

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. $$\begin{array} { c | c c } 
& \$ & £ \
\hline \mathrm { A } & \$ 6 \% & £ 5 \% \
\mathrm {~B} & \$ 7 \% & £ 4 \%
\end{array}$$
-What would be the interest rate?

Accepted Answer

The IRR on a $65m lo

Question 7

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 8

Consider bank that has entered into a five-year swap on a notational balance of $10,000,000 with a corporate customer who has agreed to pay a fixed payment of 10 percent in exchange for LIBOR.As of the fourth reset date,determine the price of the swap from the bank's point of view assuming that the fixed-rate side of the swap has increased to 11 percent.LIBOR is at 5 percent.

Accepted Answer

A) $909,090.91 gain. 
B) $90,090.09 loss. 
C) No loss or no gain since maturity has not arrived. 
D) $90,090.09 gain. 
A) $909,090.91 gain. 
B) $90,090.09 loss. 
C) No loss or no gain since maturity has not arrived. 
D) $90,090.09 gain.

Question 9

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 dollar swap quoted against flat USD LIBOR. $$\begin{array} { | l | l | l | l | } 
\hline \begin{array} { l } 
\text { Zero } \
\text { Rates }
\end{array} & 1 \text {-year } & \text { 2-year } & \text { 3-year } \
\hline \text { USD } & \$ 3 \% & \$ 4 \% & \$ 5 \% \
\hline \text { euro } & € 2 \% & € 3 \% & € 4 \% \
\hline
\end{array}$$ In other words,what will you be willing to pay in euro against receiving USD LIBOR?

Accepted Answer

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

Question 10

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. $$\begin{array} { c | c c } 
& \$ & £ \
\hline \mathrm { A } & \$ 6 \% & £ 5 \% \
\mathrm {~B} & \$ 7 \% & £ 4 \%
\end{array}$$
-What would be the interest rate?

Accepted Answer

The IRR on a £30m lo

Question 11

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 A will be willing to participate in.

Accepted Answer

Since A can redenominate a $60

Question 12

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

Accepted Answer

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

Question 13

An interest-only single currency interest rate swap

Accepted Answer

A) is also known as a plain vanilla swap. 
B) is also known as an interest rate swap. 
C) is about as simple as swaps can get. 
D) all of the above 
A) is also known as a plain vanilla swap. 
B) is also known as an interest rate swap. 
C) is about as simple as swaps can get. 
D) all of the above

Question 14

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 15

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

Accepted Answer

Since A can redenominate a $60

The size of the swap market is

Use the following information to calculate the quality spread differential (QSD): Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Company X 10\% LIBOR Company Y 12\% LIBOR +1.5\%

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

An interest-only single currency interest rate swap

Pricing an interest-only single currency swap after inception involves

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

Exam 14: Interest Rate and Currency Swaps

The size of the swap market is

Use the following information to calculate the quality spread differential (QSD): Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Company X 10\% LIBOR Company Y 12\% LIBOR +1.5\%

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

An interest-only single currency interest rate swap

Pricing an interest-only single currency swap after inception involves

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