Exam 9: Swaps and Interest Rate Derivatives

a currency swap, the effective interest rate on the money raised is known as the

________ is a cash-settled, over-the-counter forward contract that allows a company to fix an interest rate to be applied to a specified future interest period on a notional principal amount.

a _____ swap, one party pays a fixed rate calculated at the time off trade as a spread to a particular Treasury bond, and the other sides pays a floating rate.

the world capital market were fully integrated, the incentive to swap would be ____ because ____ arbitrage opportunities would exist.

currency swap is equivalent to a

The following statement is to be used in answering questions Axil Corp. has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating rate dollar borrower, which it can be at LIBOR + 1%. Bevel Corp. strongly prefers fixed rate DM debt, but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would carry. Bevel, however, can obtain Eurodollars at LIBOR + ½%. -Suppose a bank charges .8% to arrange the swap and Axil and Bevel split the resulting cost savings. Then Axil will pay _____ for its floating-rate money and Bevel will pay _____ for its fixed-rate money.

__________ swap is an agreement between two parties to exchange interest payments for a specific maturity in an agreed upon notional amount.

The following statement is to be used in answering questions Company X, a low rated firm, desires a fixed rate, long term loan. X presently has access to floating interest rate funds at a margin of 1.25% over LIBOR. Its direct borrowing cost is 11% in the fixed rate bond market. In contrast, company Y, which prefers a floating rate loan, has access to fixed rate funds in the Eurodollar bond market at 9% and floating rate funds at LIBOR + 1/4%. Suppose they split the cost savings. -much would X pay for its fixed-rate funds?

Suppose a U.S. corporation wants to secure fixed?rate funds in pounds in order to reduce its pound exposure, but is hampered in doing so because it is a relatively unknown credit in the British financial market. In contrast, a British company that is well established in its own country may desire floating?rate dollar financing, but is relatively unknown in the U.S. financial market. What is the most appropriate form of swap for these two parties?

_________ future is a cash-settled futures contract for a three-month $1,000,000 eurodollar deposit that pays LIBOR.

theoretical principal underlying the swap is termed the

The following statement is to be used in answering questions Axil Corp. has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating rate dollar borrower, which it can be at LIBOR + 1%. Bevel Corp. strongly prefers fixed rate DM debt, but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would carry. Bevel, however, can obtain Eurodollars at LIBOR + ½%. -is the maximum possible cost savings to Axil from engaging in a currency swap with Bevel?

Swaps are primarily of value because they permit firms to

economic benefits associated with swaps may derive from all of the following EXCEPT

a _______ swap, two parties exchange floating interest payments based on different reference rates.

The following statement is to be used in answering questions Company X, a low rated firm, desires a fixed rate, long term loan. X presently has access to floating interest rate funds at a margin of 1.25% over LIBOR. Its direct borrowing cost is 11% in the fixed rate bond market. In contrast, company Y, which prefers a floating rate loan, has access to fixed rate funds in the Eurodollar bond market at 9% and floating rate funds at LIBOR + 1/4%. Suppose they split the cost savings. -much would Y pay for its floating-rate funds?

__________ is a contract that fixes an interest rate today on a future loan or deposit

currency swap is most similar in economic purpose to a

The following statement is to be used in answering questions Axil Corp. has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating rate dollar borrower, which it can be at LIBOR + 1%. Bevel Corp. strongly prefers fixed rate DM debt, but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would carry. Bevel, however, can obtain Eurodollars at LIBOR + ½%. -is the maximum possible cost savings to Bevel from engaging in a currency swap with Axil?

Currency swaps are often used to provide long?term financing in foreign currencies but NOT because