Question 1

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

Accepted Answer

Since A can redenominate a $60

Question 2

When an interest-only swap is established on an amortizing basis

Accepted Answer

A) the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized. 
B) the debt service exchanges are the same each year, but the level of interest and principal changes as the loans amortize. 
C) there is no such thing as an amortizing interest-only swap. 
D) none of the above 
A) the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized. 
B) the debt service exchanges are the same each year, but the level of interest and principal changes as the loans amortize. 
C) there is no such thing as an amortizing interest-only swap. 
D) none of the above

Question 3

What would be the interest rate?

Accepted Answer

The IRR on a $65m lo

Question 4

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 5

Company X wants to borrow $10,000,000 for 5 years; company Y wants to borrow £5,000,000 for 5 years. The exchange rate is $2 = £1 and is not expected to change over the next 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 9.80%; in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed rate of 10.5%. Y will pay the swap bank interest payments on £5,000,000 at a fixed rate of 12.80% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of 12%.   What is the value of this swap to the swap bank?

Accepted Answer

A) The swap bank will earn 10 basis points per year; the only risk is default risk. 
B) The swap bank will earn 10 basis points per year but has exchange rate risk: dollar-denominated income and pound-denominated costs and default risk. 
C) The swap bank will earn 10 basis points per year but has exchange rate risk: pound-denominated income and dollar-denominated costs and default risk. 
D) The swap bank will earn 20 basis points per year in dollars but has exchange rate risk: pound-denominated income and dollar-denominated costs and default risk. 
A) The swap bank will earn 10 basis points per year; the only risk is default risk. 
B) The swap bank will earn 10 basis points per year but has exchange rate risk: dollar-denominated income and pound-denominated costs and default risk. 
C) The swap bank will earn 10 basis points per year but has exchange rate risk: pound-denominated income and dollar-denominated costs and default risk. 
D) The swap bank will earn 20 basis points per year in dollars but has exchange rate risk: pound-denominated income and dollar-denominated costs and default risk.

Question 6

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

Accepted Answer

A) the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR. 
B) the swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR. 
C) if the swap bank is successful in getting counterparties to both legs of the swap at these prices, he will have an annual profit of ten basis points. 
D) none of the above 
A) the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR. 
B) the swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR. 
C) if the swap bank is successful in getting counterparties to both legs of the swap at these prices, he will have an annual profit of ten basis points. 
D) none of the above

Question 7

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?

Accepted Answer

A) Firm A borrows $10 million externally for 5 years at LIBOR; agrees to swap LIBOR to firm B for 8 ½ % fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at 10%. 
B) A borrows $10 million externally for 5 years at LIBOR; agrees to pay 8½% to B for LIBOR fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at 10%. 
C) Since the QSD = 0 there is no mutually beneficial swap. 
D) A borrows $10 million externally at 8% fixed for 5 years; agrees to swap LIBOR to B for 8½% fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at LIBOR + 1%. 
A) Firm A borrows $10 million externally for 5 years at LIBOR; agrees to swap LIBOR to firm B for 8 ½ % fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at 10%. 
B) A borrows $10 million externally for 5 years at LIBOR; agrees to pay 8½% to B for LIBOR fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at 10%. 
C) Since the QSD = 0 there is no mutually beneficial swap. 
D) A borrows $10 million externally at 8% fixed for 5 years; agrees to swap LIBOR to B for 8½% fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at LIBOR + 1%.

Question 8

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 9

What would be the interest rate?

Accepted Answer

The IRR on a £30m lo

Question 10

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

Accepted Answer

Since B can redenominate a €40

Question 11

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 12

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

Accepted Answer

A) Yes, QSD = [€7% - €6% × $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% 
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:   Suppose they agree to the swap shown at right. Is this mutually beneficial swap equally fair to both parties?   
B)  No, company A borrows at 6% in euro but company B borrows at 8% in dollars 
C)  Yes, A will be better off by €1% on €1m; B by 1% on $2m and $2.00 = €1.00 
D)  No, company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B 
A) Yes, QSD = [€7% - €6% × $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% 
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:   Suppose they agree to the swap shown at right. Is this mutually beneficial swap equally fair to both parties?   
B)  No, company A borrows at 6% in euro but company B borrows at 8% in dollars 
C)  Yes, A will be better off by €1% on €1m; B by 1% on $2m and $2.00 = €1.00 
D)  No, company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B

Question 13

Compute the payments due in the FIRST year on a three-year AMORTIZING swap from company B to company

Accepted Answer

A) B pays £402,114.80 to A 
A)  Company A and company B both want to borrow £1,000,000 for three years. A wants to borrow floating and B wants to borrow fixed. A and B agree to split the QSD.   
B)  B pays £100,000 to A 
C)  B pays £69,788.52 to A 
D)  None of the above 
A) B pays £402,114.80 to A 
A)  Company A and company B both want to borrow £1,000,000 for three years. A wants to borrow floating and B wants to borrow fixed. A and B agree to split the QSD.   
B)  B pays £100,000 to A 
C)  B pays £69,788.52 to A 
D)  None of the above

Question 14

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

Question 15

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 16

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; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 10.05%. 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?

Accepted Answer

A) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. 
B) The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year. 
C) The swap bank will LOSE money. 
D) None of the above 
A) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. 
B) The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year. 
C) The swap bank will LOSE money. 
D) None of the above

Question 17

Consider a fixed for fixed currency swap. The Dow Corporation is a U.S.-based multinational. The Jones Corporation is a U.K.-based multinational. Dow wants to finance a £2 million expansion in Great Britain. Jones wants to finance a $4 million expansion in the U.S. The spot exchange rate is £1.00 = $2.00. Dow can borrow dollars at $10% and pounds sterling at 12%. Jones can borrow dollars at 9% and pounds sterling at 10%. Assuming that the swap bank is willing to take on exchange rate risk, but the other counterparties are not, which of the following swaps is mutually beneficial to each party and meets their financing needs?

Accepted Answer

A) Dow should borrow $4 million in dollars externally at $10%; pay £11¾% in pounds to the swap bank on a notational principal of £2 million; receive $10% from the swap bank on a notational principal of $4million. Jones, borrows £2 million pounds externally at £10%; pays $8¾% to the swap bank on a notational principal of $4 million and receives £10% in pounds from the swap bank on a notational principal of £2 million. 
B) Dow should borrow $4 million in dollars externally at $10%; pay £11½ % in pounds to the swap bank on a notational principal of £2 million; receive $10% from the swap bank on a notational principal of $4 million. Jones, borrows £2 million pounds externally at £10%; pays $8½% to the swap bank on a notational principal of $4 million and receives £10% in pounds from the swap bank on a notational principal of £2 million. 
C) Dow should borrow $4 million in dollars externally at $10%; pay £11% in pounds to the swap bank on a notational principal of £2 million; receive $8% from the swap bank on a notational principal of $4 million. Jones, borrows £2 million pounds externally at £10%; pays $10% to the swap bank on a notational principal of $4 million and receives £11% in pounds from the swap bank on a notational principal of £2 million. 
D) There is no swap that is possible. 
A) Dow should borrow $4 million in dollars externally at $10%; pay £11¾% in pounds to the swap bank on a notational principal of £2 million; receive $10% from the swap bank on a notational principal of $4million. Jones, borrows £2 million pounds externally at £10%; pays $8¾% to the swap bank on a notational principal of $4 million and receives £10% in pounds from the swap bank on a notational principal of £2 million. 
B) Dow should borrow $4 million in dollars externally at $10%; pay £11½ % in pounds to the swap bank on a notational principal of £2 million; receive $10% from the swap bank on a notational principal of $4 million. Jones, borrows £2 million pounds externally at £10%; pays $8½% to the swap bank on a notational principal of $4 million and receives £10% in pounds from the swap bank on a notational principal of £2 million. 
C) Dow should borrow $4 million in dollars externally at $10%; pay £11% in pounds to the swap bank on a notational principal of £2 million; receive $8% from the swap bank on a notational principal of $4 million. Jones, borrows £2 million pounds externally at £10%; pays $10% to the swap bank on a notational principal of $4 million and receives £11% in pounds from the swap bank on a notational principal of £2 million. 
D) There is no swap that is possible.

Question 18

In the problem just previous, company X

Accepted Answer

A) is probably British. 
B) is probably American. 
C) has a comparative advantage in borrowing pounds. 
D) both a and c 
A) is probably British. 
B) is probably American. 
C) has a comparative advantage in borrowing pounds. 
D) both a and c

Question 19

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 20

A swap bank makes the following quotes for 5-year swaps and AAA-rated firms:

Accepted Answer

A) The bank stands ready to pay $5.2% against receiving dollar LIBOR on 5-year loans. 
B) The bank stands ready to receive €7% against receiving dollar LIBOR on 5-year loans. 
C) The bank stands ready to pay €7% against receiving dollar LIBOR on 5-year loans. 
D) None of the above 
A) The bank stands ready to pay $5.2% against receiving dollar LIBOR on 5-year loans. 
B) The bank stands ready to receive €7% against receiving dollar LIBOR on 5-year loans. 
C) The bank stands ready to pay €7% against receiving dollar LIBOR on 5-year loans. 
D) None of the above

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

When an interest-only swap is established on an amortizing basis

What would be the interest rate?

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.

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

What would be the interest rate?

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

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.

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

Compute the payments due in the FIRST year on a three-year AMORTIZING swap from company B to company A)B pays £402,114.80 to A

An interest-only single currency interest rate swap

In the problem just previous, company X

A swap bank makes the following quotes for 5-year swaps and AAA-rated firms:

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

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

When an interest-only swap is established on an amortizing basis

What would be the interest rate?

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.

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

What would be the interest rate?

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

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.

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

Compute the payments due in the FIRST year on a three-year AMORTIZING swap from company B to company A)B pays £402,114.80 to A

An interest-only single currency interest rate swap

In the problem just previous, company X

A swap bank makes the following quotes for 5-year swaps and AAA-rated firms:

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