Deck 8: Swaps and Interest Rate Derivatives

Question 1

A currency swap is most similar in economic purpose to a

A) basis swap
B) parent company loan
C) debt?equity swap
D) parallel loan

Answer 1

D

Question 2

In 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.

A) currency
B) interest rate
C) coupoon
D) basis

Answer 2

C

Question 3

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.

A) LIBOR ? .7%; 7.5%
B) LIBOR + .4%; 7.15%
C) LIBOR; 7.45%
D) LIBOR + .5%; 6.75%

Answer 3

B

Question 4

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

A) forward
B) eurodollar
C) forward rate agreement
D) currency swap

Question 5

Currency swaps are often used to provide long?term financing in foreign currencies because

A) long?term capital markets are not well developed
B) long?term forward foreign exchange markets are absent
C) of high foreign taxes
D) a and b only

Question 6

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

A) notional principal
B) all-in cost
C) right of offset
D) yield to call

Question 7

Swaps provide a real economic benefit to the counterparties only if a barrier exists to prevent ______ from functioning fully.

A) hedging
B) factoring
C) arbitrage
D) forfaiting

Question 8

The economic benefits associated with swaps may derive from

A) legal restrictions on spot and forward foreign exchange transactions
B) different perceptions by investors of risk and creditworthiness of the two parties to the swap
C) appeal or acceptability of one borrower to a certain class of investor
D) all of the above

Question 9

A currency swap is equivalent to a

A) currency option, with the exercise price equal to the current spot rate
B) long?dated forward foreign exchange contract, where the forward rate is the current spot rate.
C) interest rate swap, where the basis is the differential between the fixed and floating interest rates
D) short?term currency futures contract

Question 10

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

A) interest rate
B) currency
C) bond
D) currency bond

Question 11

How much would X pay for its fixed?rate funds?

A) 9.5%
B) 10.0%
C) 10.5%
D) 10.75%

Question 12

The theoretical principal underlying the swap is termed the

A) basis amount
B) swap differential
C) notional principal
D) arbitrage principal

Question 13

In a __________ swaps, two parties exchange floating interest payments based on different reference rates.

A) basis
B) coupon
C) notional
D) forward rate

Question 14

________ 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) interest rate currency swap
B) dual currency bond
C) exchange of principal
D) forward rate agreement

Question 15

What is the maximum possible cost savings to Axil from engaging in a currency swap with Bevel?

A) 1%
B) 75%
C) 2%
D) 1.25%

Question 16

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

A) inverse floater
B) step-up
C) step-down
D) forward forward

Question 17

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

A) increased; more
B) reduced; fewer
C) increased; fewer
D) reduced; more

Question 18

Swaps are primarily of value because they permit firms to

A) tap new capital markets
B) reduce risks
C) reduce taxes
D) a and b only

Question 19

What is the maximum possible cost savings to Bevel from engaging in a currency swap with Axil?

A) 1%
B) 75%
C) 2%
D) 1.25%

Question 20

How much would Y pay for its floating?rate funds?

A) LIBOR ?.25%
B) LIBOR ?.50%
C) LIBOR
D) LIBOR + .5%

Question 21

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?

A) interest rate/currency swap
B) currency swap
C) interest rate swap
D) debt/equity swap