Deck 8: Swaps

Question 1

Describe briefly the nature of a swap and its primary component.

Answer 1

A swap is an agreement between two parties. The main part is the contractual obligation to exchange some specified cash flows.

Question 2

Assume corn spot prices over the next 3 years are $2.20, $2.35, and $2.28, respectively. The original swap price was $2.30 per bushel. If cash settlement occurs, what transaction will the counter-party make in year 2 on a 5,000-bushel swap agreement?

A) $250 payment
B) $250 receipt
C) $100 payment
D) $100 receipt

Answer 2

A

Question 3

The set of swap rates that correspond to different maturities, as implied by LIBOR, is called the .

A) Swap gain
B) Swap curve
C) Yield gain
D) Yield curve

Answer 3

B

Question 4

Given zero-coupon bond yields are 5.2%, 5.5%, and 5.8% in years 1, 2, and 3, respectively, calculate the prepaid swap price for corn. Assume corn forward prices for the proceeding 3 years are $2.10, $2.20, and $2.35, respectively.

A) $5.96
B) $6.04
C) $6.12
D) $6.20

Question 5

Assume corn forward prices over the next 3 years are $2.25, $2.35, and $2.28, respectively. Effective annual interest rates over the same period are 5.2%, 5.5%, and 5.8%. What is the 2- year swap price on a hypothetical ʺforward swapʺ that begins at the end of year 1?

A) $2.14
B) $2.32
C) $2.41
D) $2.53

Question 6

What change in cash flows will occur to the fixed rate payer at settlement, in an interest rate swap agreement, when market interest rates rise?

A) An increase in cash received
B) A decrease in cash received
C) No change in cash received
D) It cannot be determined based on the information given

Question 7

The hedge created by a commodity swap does not protect the hedger against what type of risk?

A) Commodity price ris
B) Reinvestment risk
C) Inflation risk
D) Interest rate risk

Question 8

What is the 3-year swap price on corn? Assume interest rates over the next 3 years are 6.2%, 6.5%, and 6.8%. The prepaid swap price is given as $6.50.

A) $2.10
B) $2.30
C) $2.46
D) $2.64

Question 9

The 3-year swap price on a new corn swap agreement is $5.94. Interest rates immediately rise on 1, 2, and 3-year zero coupon bonds from 5.1%, 5.4%, and 5.7% to 5.2%, 5.6%, and 6.0%, respectively. What is net swap payment per year if the reverse transaction occurs? Assume year 1, 2, and 3 forward prices are $2.05, $2.15, and $2.30, respectively and do not change.

A) $0.35
B) $0.49
C) $0.64
D) $0.75

Question 10

Euro dollar futures prices with maturities of 3, 6, and 9 months are 89.04, 88.75, and 88.55, respectively. What is the annualized swap rate on 9-month securities?

A) 8.55%
B) 9.68%
C) 11.34%
D) 13.24%

Question 11

Your company can get yen loans for 2.0%. Dollar rates on the same loans are 4.5%. The spot yen per dollar exchange rate is 104. The forward rates for years 1 thru 4 are, 101.51, 99.08, 96.71, and 94.40, respectively. What is the present value of the market-makerʹs net cash flow if spot rates are 102 instead?

A) $188.59
B) $206.43
C) $219.96
D) $242.06

Question 12

An investor enters into a 2-year swap agreement to euros at $1.32 per euro. Soon after the swap is created forward prices rise and the new swap price on a similar swap is $1.45. If dollar denominated interest rates are 4.0% and 4.5% on 1- and 2-year zero coupon government bonds, respectively, what is the gain to be made from unwrapping the original swap agreement?

A) $0.24
B) $0.45
C) $0.65
D) $0.82

Question 13

IBM and AT&T decide to swap $1 million loans. IBM currently pays 9.0% fixed and AT&T pays 8.5% on a LIBOR + 0.5% loan. What is the net cash flow for IBM if they swap their fixed loan for a LIBOR + 0.5% loan and LIBOR rises to 8.5%?

A) -$50,000
B) $50,000
C) -$90,000
D) 0

Question 14

A 6 month swaption on oil has a strike price of $15. With 3 month remaining, the fixed price on the swap is $16.00. If an investor exercises the swaption and enters into a new swap, what is the net cash flow at settlement?

A) $15.00 paid
B) $16.00 received
C) $1.00 paid
D) $1.00 received

Question 15

Assume the net swap payment is $.50 on a reverse transaction involving a 3-year corn swap. What is the market value of the swap given interest rates on zero coupon treasury bonds are 5.2%, 5.6%, and 6.0% for 1, 2, and 3 years, respectively?

A) $0.96
B) $1.10
C) $1.25
D) $1.34

Question 16

An oil buyer and seller enter into a financially settled 1 year swap. The spot price is $86.20 and the swap price is $90.00. How much will the oil seller receive as the swap payment?

A) $0
B) $3.80
C) $86.20
D) $90.00

Question 17

A portfolio manager enters into a total return swap. She swaps 50% of her $50 million index based portfolio for 4.5% yield bonds. If the annualized total return on the index is 2.5%, what net cash flow will the manager experience under the swap agreement?

A) + $250,000
B) -$250,000
C) + $500,000
D) -$500,000

Question 18

The forward prices on a barrel of crude oil are $43 and $45 in years one and two, respectively. The interest rates on zero coupon government bonds are 4.0% and 4.5% in years one and two, respectively. What is the likely 2-year swap price on a barrel of crude oil?

A) $43.00
B) $43.97
C) $44.00
D) $45.00

Question 19

An investor enters into a 2-year swap agreement to purchase crude oil at $43.26 per barrel. Soon after the swap is created forward prices rise and the new swap price on a similar swap is $44.12. If interest rates are 5.0% per year, what is the gain to be made from unwrapping the original swap agreement?

A) $0.86
B) $1.60
C) $1.64
D) $1.72

Question 20

Your company can get yen loans for 2.0%. Dollar rates on the same loans are 4.5%. The spot yen per dollar exchange rate is 104. The forward rates for years 1 thru 4 are, 101.51, 99.08, 96.71, and 94.40, respectively. What is the dollar value of a 4-year 1 million yen loan?

A) $9,615.33
B) $10,422.46
C) $11,618.04
D) $13,527.89

Question 21

Explain a ʺdiff swapʺ as it relates to currency swaps.

Question 22

Under what circumstances would a multinational company elect to enter into a currency swap agreement?

Question 23

Why do arbitrage profits rarely exist in interest rate swap pricing?