Exam 13: Interest Rate Forwards and Options

Find the rate on a pure discount loan hedged with a long FRA if the loan is for $10 million and matures in 30 days, the FRA is 30-day LIBOR, the fixed rate on the FRA is 4 percent, and LIBOR at the time the loan is taken out is 5 percent.

A long cap and a long floor with the exercise price set at the swap rate is equivalent to a swap.

A long position in an interest rate call would be appropriate for which of the following situations:

A bank buys an interest rate floor in conjunction with a loan it holds that will make four semiannual payments starting six months from now. The floor has a strike of 9 percent. LIBOR at the beginning of the four payment periods is 10, 11, 8, and 8.6 percent. On which dates will the floor writer make a payment to the bank?

The fixed rate on an FRA expiring in 30 days on 180-day LIBOR with the 30-day rate being 5 percent and the 210 day rate being 6 percent is

In a zero cost collar, the exercise price on the floor is set such that the floor premium more than offsets the cap premium.

If a lender uses a collar, the transactions would be

Suppose you have a floating rate loan tied to 90-day LIBOR and have hedged the interest rate risk with an interest rate cap. The effective annual rate actually paid on the loan with the cap is found using a methodology equivalent to

Payer swaptions can be used to convert callable to non-callable debt.

Determine the value of an interest rate call option at the maturity of a loan if the call has a strike of 12 percent, a face value of $50 million, the loan matures 90 days after the call is exercised, the call expires in 60 days, the call premium is $200,000, and LIBOR ends up at 13 percent.

In a 12 x 18 FRA, the derivative expires in one year and the underlying matures in 18 months.

For firms that may need to enter into a swap in the future, a forward swap serves as well as a swaption.

A bank makes a $5 million 180-day pure discount loan at LIBOR of 9 percent. At the same time, however, it exercises an interest rate put that has a strike of 11 percent. Find the annualized rate of return on the loan. Ignore the cost of the put.

The appropriate fixed rate on an FRA is the forward rate in the term structure.

The value of an FRA is obtained by determining the value of a strategy of long a long-term underlying time deposit and short a short-term underlying time deposit.

The payoff to the holder of a long FRA on 90-day LIBOR with a fixed rate of 8.75 percent, a notional amount of $20 million if the underlying is 9 percent at expiration is

Receiver swaptions allow a firm to receive a floating rate.

Suppose your firm issued a callable bond two years ago and it has three more years to go before the first call date. If interest rates have fallen over the past two years and you believe rates will not stay this low and that it would be in the firm's best interest to lengthen the duration of the liabilities, which of the following is one potential strategy to accomplish the objective of lengthening the duration while also securing the lowering interest rate.

An interest rate floor is a combination of interest rate puts designed to protect a lender in a floating-rate loan against interest rate increases.

Which of the following strategies replicates a long position in an FRA?