Question 1

The primary reasons for a counterparty to use a currency swap are

Accepted Answer

A) to hedge and to speculate. 
B) to play in the futures and forward markets. 
C) to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure. 
D) both a and b 
A) to hedge and to speculate. 
B) to play in the futures and forward markets. 
C) to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure. 
D) both a and b

Question 2

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

Accepted Answer

Since B can redenominate a £30

Question 3

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 4

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) If the swap bank has already contracted one leg of the swap, they should be anxious to offer better terms to company Y to just get the deal done. 
B) The swap bank could just sell the company X side of the swap. 
C) Company X should lobby Y to "get on board". 
D) Both a and b 
A) If the swap bank has already contracted one leg of the swap, they should be anxious to offer better terms to company Y to just get the deal done. 
B) The swap bank could just sell the company X side of the swap. 
C) Company X should lobby Y to "get on board". 
D) Both a and b

Question 5

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 6

With regard to a swap bank acting as a dealer in swap transactions, interest rate 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 swap 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 a counterparty will default. 
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 swap 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 a counterparty will default.

Question 7

Use the following information to calculate the quality spread differential (QSD):

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 8

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 9

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 10

A major risk faced by a swap dealer is credit risk. This is

Accepted Answer

A) the probability that a counterparty will default. 
B) the probability that both counterparties default. 
C) the probability floating rates will move against the dealer. 
D) none of the above 
A) the probability that a counterparty will default. 
B) the probability that both counterparties default. 
C) the probability floating rates will move against the dealer. 
D) none of the above

Question 11

Consider the dollar- and euro-based borrowing opportunities of companies A and

Accepted Answer

A) No, QSD = 0 
B)    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? 
B)  Yes, QSD = 2% = (7% - 6%) - (8% - 9%) = 1% - (-1%) 
C)  Yes, QSD = [€7% - €6%] × $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% 
D)  Yes, QSD = [€7% - €6%] - ($8% - $9%) × €1.00/$2.00 = €1½% 
A) No, QSD = 0 
B)    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? 
B)  Yes, QSD = 2% = (7% - 6%) - (8% - 9%) = 1% - (-1%) 
C)  Yes, QSD = [€7% - €6%] × $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% 
D)  Yes, QSD = [€7% - €6%] - ($8% - $9%) × €1.00/$2.00 = €1½%

Question 12

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:   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%. What is the value of this swap to company X?

Accepted Answer

A) Company X will lose money on the deal. 
B) Company X will save 25 basis points per year on $10,000,000 = $25,000 per year. 
C) Company X will only break even on the deal. 
D) Company X will save 5 basis points per year on $10,000,000 = $5,000 per year. 
A) Company X will lose money on the deal. 
B) Company X will save 25 basis points per year on $10,000,000 = $25,000 per year. 
C) Company X will only break even on the deal. 
D) Company X will save 5 basis points per year on $10,000,000 = $5,000 per year.

Question 13

Amortizing currency swaps

Accepted Answer

A) the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized. 
B) incorporate an amortization feature in which periodically the amortized portions of the notational principals are re-exchanged. 
C) both a and b 
D) none of the above 
A) the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized. 
B) incorporate an amortization feature in which periodically the amortized portions of the notational principals are re-exchanged. 
C) both a and b 
D) none of the above

Question 14

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.   In other words, what 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 15

Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined as

Accepted Answer

A) "basis risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index. 
B) "basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. 
C) "basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an opposing counterparty the other side of an interest rate swap entered into with a counterparty, and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. 
D) "basis risk" refers to the risk of fluctuating exchange rates, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index. 
A) "basis risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index. 
B) "basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. 
C) "basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an opposing counterparty the other side of an interest rate swap entered into with a counterparty, and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. 
D) "basis risk" refers to the risk of fluctuating exchange rates, and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index.

Question 16

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 17

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. The means

Accepted Answer

A) the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar payments of 8.50 percent against receiving semiannual fixed-rate euro payments of 6.80. 
B) the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate euro payments of 6.60 percent against receiving semiannual fixed-rate dollar payments of 8.60. 
C) both a and b 
D) none of the above 
A) the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar payments of 8.50 percent against receiving semiannual fixed-rate euro payments of 6.80. 
B) the swap bank will enter into a currency swap in which it would pay semiannual fixed-rate euro payments of 6.60 percent against receiving semiannual fixed-rate dollar payments of 8.60. 
C) both a and b 
D) none of the above

Question 18

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 19

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:   A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. Assume company Y has agreed, but company X will only agree to the swap if the bank offers better terms.
What are the absolute best terms the bank can offer X, given that it already booked Y?

Accepted Answer

A) 10.45%-10.45% against LIBOR flat. 
B) 10.45%-10.05% against LIBOR flat. 
C) 10.50%-10.50% against LIBOR flat. 
D) none of the above.   
A) 10.45%-10.45% against LIBOR flat. 
B) 10.45%-10.05% against LIBOR flat. 
C) 10.50%-10.50% against LIBOR flat. 
D) none of the above.

Question 20

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

The primary reasons for a counterparty to use a currency swap are

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

Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk.

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".

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

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

Use the following information to calculate the quality spread differential (QSD):

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.

A major risk faced by a swap dealer is credit risk. This is

Consider the dollar- and euro-based borrowing opportunities of companies A and

Amortizing currency swaps

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. In other words, what you be willing to pay in euro against receiving USD LIBOR?

Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined as

When a swap bank serves as a dealer:

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. The means

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

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

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

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Exam 14: Interest Rate and Currency Swaps

The primary reasons for a counterparty to use a currency swap are

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

Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk.

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".

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

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

Use the following information to calculate the quality spread differential (QSD):

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.

A major risk faced by a swap dealer is credit risk. This is

Consider the dollar- and euro-based borrowing opportunities of companies A and

Amortizing currency swaps

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. In other words, what you be willing to pay in euro against receiving USD LIBOR?

Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined as

When a swap bank serves as a dealer:

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. The means

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

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

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