Deck 10: Management of Translation Exposure

Question 1

Which of the following is NOT true about swap banks?

A)A swap bank can be an international commercial bank.
B)A swap bank can be an investment bank.
C)A swap bank can be a central bank.
D)A swap bank can be an independent operator.

Answer 1

C

Question 2

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 SF10,000,000 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%.

A)SF248,685
B)SF900,000
C)SF2,700,000
D)SF7,300,000

Answer 2

A

Question 3

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

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)a and b

Answer 3

C

Question 4

If company A and company B share the interest savings from the interest rate swap equally,company A will pay after the swap on its preferred debt:

A)5.5%
B)5.75%
C)LIBOR 0.75%
D)LIBOR

Question 5

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

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 6

Swap bank quotes 5.40-5.70 for the euro.This means the swap bank will

A)Receive 5.40 percent semi-annual fixed payments against paying six-month LIBOR
B)Receive 5.70 percent semi-annual fixed payments against paying six-month LIBOR
C)Pay 5.70 percent semi-annual fixed payments against receiving six-month LIBOR
D)a and c

Question 7

Which combination of the following statements is true about the risks that a swap dealer confronts:
(i)- interest rate risk
(ii)- basis risk
(iii)- exchange rate risk
(iv)- political risk
(v)- sovereign risk

A)(i), (ii), (iii), and (v)
B)(i), (iii), and (iv)
C)(iii), (iv), and (iv)
D)(i), (ii), (iii), (iv), and (v)

Question 8

Calculate the quality spread differential (QSD):

A)0.50%
B)1.00%
C)1.50%
D)2.00%

Question 9

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

A)0.50%
B)1.00%
C)1.50%
D)2.00%

Question 10

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:

A)fixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a floating-rate debt obligations for fixed-rate interest payments of the other counter party
B)fixed-for-fixed rate debt service (currency swap), where one counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counter party denominated in another currency
C)a and b
D)none of these

Question 11

Which of the following are possible swaps:

A)Floating-for-floating
B)Zero-coupon for floating
C)Fixed for floating
D)All of these

Question 12

Suppose ABC Investment Banker,Ltd.is quoting swap rates as follows: 7.50 - 7.85 annually against six-month dollar LIBOR for dollars,and 11.00 - 11.30 percent annually against six-month dollar LIBOR for British pound sterling.ABC would enter into a $/£ currency swap in which:

A)it would pay annual fixed-rate dollar payments of 7.5% in return for receiving annual fixed-rate £ payments at 11.3%
B)it will receive annual fixed-rate dollar payments at 7.85% against paying annual fixed-rate £ payments at 11%
C)a and b
D)none of these

Question 13

What rate would company A have to pay on its floating rate debt so that an interest rate swap would no longer benefit each party?

A)LIBOR 0.5
B)LIBOR
C)LIBOR + 0.5
D)An interest swap is always beneficial for both parties involved

Question 14

Which combination of the following statements is true about a swap bank?
(i)- it is a generic term to describe a financial institution that facilitates swaps between counterparties
(ii)- it can be an international commercial bank
(iii)- it can be an investment bank
(iv)- it can be a merchant bank
(v)- it can be an independent operator

A)(i) and (ii)
B)(i), (ii) and (iii)
C)(i), (ii), (iii) and (iv)
D)(i), (ii), (iii), (iv) and (v)

Question 15

Find QSD

A)1%
B)1.2%
C)2.2%
D)3.2%

Question 16

Company A swaps fixed-rate US dollar debt with Company B for floating-rate Canadian dollar debt.This is a

A)single-currency interest rate swap
B)currency swap
C)cross-currency interest rate swap
D)none of these

Question 17

Which firms will benefit from a currency swap?

A)neither firm
B)the Canadian firm only
C)both firms
D)need more information

Question 18

What will be the annual GROSS interest payment of firm A to the swap bank? (where "GROSS" means that it does not take into account the payment made by the swap bank to firm A on the loan that firm A made to the swap bank)

A)£66,000
B)£76,000
C)$72,000
D)$216,000

Question 19

The term interest rate swaps

A)refers to a "single-currency interest rate swap" shortened to "interest rate swap"
B)involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals
C)can be "fixed-for-floating rate" or "fixed-for-fixed rate"
D)All of these

Question 20

If the Canadian and the French firms share the interest savings from the currency swap equally,the Canadian firm will pay on its French debt after the swap:

A)The same as without the swap
B)5%
C)5.5%
D)6%

Question 21

ABC Corporation has entered into a 10-year interest rate swap with a swap bank.ABC Corp.pays the swap bank a fixed-rate of 6 percent annually on a notional amount of EUR100,000,000 and receives LIBOR _- ½ percent.What is the price of the swap on the seventh reset date,assuming that the fixed-rate at which ABC can borrow has decreased to 5%.

Question 22

The following information is given. Boeing and Airbus have agreed to swap their debt payments so that each firm gets its preferred debt terms.Each firm will save the same amount in percentage terms.
a)Does Boeing prefer fixed or floating rate debt?
What rate does it pay on its preferred debt?
b)Does Airbus prefer fixed or floating rate debt?
What rate does it pay on its preferred debt?
c)What are the total interest savings available in this interest rate swap?
d)Which company has the advantage in fixed rate debt?

Question 23

The following information is given:

Question 24

The following information is given. ABC Inc.and XYZ Inc.have agreed to swap their debt payments so that each firm gets its preferred debt terms.They can arrange an interest rate swap through Big Bank.Big bank charges 0.15% for its services.The remaining savings from the interest rate swap are equally shared by A and B.
QSD:
1% .25% = .75%; after bank fees:
.75% .15% = .60% savings available
a)Does ABC Inc.prefer fixed or floating rate debt?
What rate does it pay on its preferred debt?
b)Does XYZ Inc.prefer fixed or floating rate debt?
What rate does it pay on its preferred debt?
c)What are the total interest savings available in this interest rate swap?
d)Which company has a better credit rating?

Question 25

Canada Corporation enters into a 2-year interest rate swap with Bank A in which it agrees to pay the swap bank a fixed-rate of 5 percent annually on a notional amount of US$1,000,000 and receive LIBOR - 1 percent.Determine the price of the swap on the first reset date,assuming that the fixed-rate at which Canada Corporation can borrow has stayed unchanged.