Question 1

What would be the interest rate?

Accepted Answer

The IRR on a $65m loan with payments of $2,446,153.85 and $60,823,076.92 is 6%.

Question 2

What would be the interest rate?

Accepted Answer

The IRR on a €40m loan with payments of €2,747,663,55 and €41,214,953.27 is 5%.

Question 3

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) the reference rates can be the same but have different frequencies. 
C) both a and b 
D) none of the above 
A) the reference rates are different for the different currencies: e.g. dollar LIBOR versus euro LIBOR. 
B) the reference rates can be the same but have different frequencies. 
C) both a and b 
D) none of the above C

Question 4

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

Accepted Answer

The answer of What are the IRP 1-year and 2-year...

Question 5

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 6

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 7

In an efficient market without barriers to capital flows, the cost-savings argument of the QSD is difficult to accept, because

Accepted Answer

A) it implies that an arbitrage opportunity exists because of some mispricing of the default risk premiums on different types of debt instruments. 
B) it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on different maturities of forward contracts. 
C) none of the above 
A) it implies that an arbitrage opportunity exists because of some mispricing of the default risk premiums on different types of debt instruments. 
B) it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on different maturities of forward contracts. 
C) none of the above

Question 8

Consider the situation of firm A and firmB. 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.   The IRP 1-year and 2-year forward exchange rates are     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 Consider the situation of firm A and...

Question 9

Explain how firm B could use the forward exchange markets to redenominate a 2-year €40m 5% euro loan into a 2-year USD-denominated loan.

Accepted Answer

Firm B could borrow €40m today and excha

Question 10

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 11

Consider fixed-for-fixed currency swap. Firm A is a U.S.-based multinational. Firm B is a U.K.-based multinational. Firm A wants to finance a £2 million expansion in Great Britain. Firm B wants to finance a $4 million expansion in the U.S. The spot exchange rate is £1.00 = $2.00. Firm A can borrow dollars at $10% and pounds sterling at 12%. Firm B can borrow dollars at 9% and pounds sterling at 11%. Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk.

Accepted Answer

A)  There is no mutually beneficial swap that has neither party facing exchange rate risk. 
B)  Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 8% in dollars to A. 
C)  Firm A should borrow $2 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 4 million pounds and pays 8% in dollars to A. 
D)  Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 10% in dollars to A. 
A)  There is no mutually beneficial swap that has neither party facing exchange rate risk. 
B)  Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 8% in dollars to A. 
C)  Firm A should borrow $2 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 4 million pounds and pays 8% in dollars to A. 
D)  Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 10% in dollars to A.

Question 12

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 13

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 14

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 15

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:

Accepted Answer

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

Question 16

Come up with a swap (principal + interest) for two parties A and B who have the following borrowing opportunities.   The current exchange rate is $1.60 = €1.00. Company "A" wishes to borrow $1,000,000 for 5 years and "B" wants to borrow €625,000 for 5 years. You are a swap dealer. Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B. Firms A and B are more concerned with what currency that they borrow in than whether the debt is fixed or floating.

Accepted Answer

The answer of Come up with a swap (principal +...

Question 17

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 18

A major that can be eliminated through a swap is exchange rate risk.

Accepted Answer

A) But only to the extent that a foreign counterparty will NOT default in a currency swap. 
B) But only if the bid-ask spreads are wide. 
C) But swaps can be less efficient in this than just trading at the expected spot exchange rates each year. 
D) None of the above 
A) But only to the extent that a foreign counterparty will NOT default in a currency swap. 
B) But only if the bid-ask spreads are wide. 
C) But swaps can be less efficient in this than just trading at the expected spot exchange rates each year. 
D) None of the above

Question 19

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

Accepted Answer

Since A can redenominate a $60

Question 20

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 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 take.

What would be the interest rate?

What would be the interest rate?

Floating for floating currency swaps

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

Floating for floating currency swaps

In an efficient market without barriers to capital flows, the cost-savings argument of the QSD is difficult to accept, because

Explain how firm B could use the forward exchange markets to redenominate a 2-year €40m 5% euro loan into a 2-year USD-denominated loan.

A swap bank

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".

When a swap bank serves as a broker:

A major that can be eliminated through a swap is exchange rate risk.

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

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

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

What would be the interest rate?

What would be the interest rate?

Floating for floating currency swaps

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

Floating for floating currency swaps

In an efficient market without barriers to capital flows, the cost-savings argument of the QSD is difficult to accept, because

Explain how firm B could use the forward exchange markets to redenominate a 2-year €40m 5% euro loan into a 2-year USD-denominated loan.

A swap bank

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".

When a swap bank serves as a broker:

A major that can be eliminated through a swap is exchange rate risk.

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

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

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