Question 1

A major risk faced by a swap dealer is exchange rate risk.This is

Accepted Answer

A) the probability that a foreign counterparty will default in a currency swap. 
B) the probability that either counterparty defaults in a currency swap. 
C) the probability exchange rates will move against the dealer. 
D) none of the above

Question 2

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

Accepted Answer

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) both a) and b)

Question 3

What are the IRP 1-year and 2-year forward exchange rates?

Accepted Answer

The answer of What are the IRP 1-year and 2-year...

Question 4

Find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent.

Accepted Answer

A) LIBOR + ½ percent 
B) LIBOR 
C) LIBOR - ½ percent 
D) None of the above

Question 5

Consider the dollar- and euro-based borrowing opportunities of companies A and B)  
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as $2.00*(1.08)/€1.00*(1.06) = $2.0377/€1.Is there a mutually beneficial swap?

Accepted Answer

A) No, QSD = 0 
B) Yes, QSD = 2% = (7% - 6%) - (8% - 9%) = 1% - (-1%) 
C) Yes, QSD = [€7% - €6%]*$2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% 
D) Yes, QSD = [€7% - €6%]- ($8% - $9%)*€1.00/$2.00= €1½%

Question 6

Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan.

Accepted Answer

The answer of Explain how firm A could use the...

Question 7

Consider the situation of firm A and firm B. The current exchange rate is $2.00/£. Firm A is a U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA credit ratings. 
-What are the IRP 1-year and 2-year forward exchange rates?

Accepted Answer

The answer of Consider the situation of firm A and...

Question 8

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below:  A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%.Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%.  What is the value of this swap to the swap bank?

Accepted Answer

A) The swap bank will lose money on the deal. 
B) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. 
C) The swap bank will break even. 
D) None of the above

Question 9

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

Accepted Answer

A) the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR. 
B) the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying six-month dollar LIBOR. 
C) both a) and b) 
D) none of the above

Question 10

A major risk faced by a swap dealer is sovereign risk.This is

Accepted Answer

A) the probability that a sovereign counterparty will default. 
B) the probability that a country will impose exchange restrictions on a currency involved in an existing swap. 
C) the probability governments will intervene to support an exchange rate. 
D) none of the above

Question 11

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

Accepted Answer

A) the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR. 
B) the swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR. 
C) if the swap bank is successful in getting counterparties to both legs of the swap at these prices, he will have an annual profit of ten basis points. 
D) none of the above

Question 12

Consider fixed-for-fixed currency swap.Firm A is a U.S.-based multinational.Firm B is a U.K.-based multinational.Firm A wants to finance a £2 million expansion in Great Britain.Firm B wants to finance a $4 million expansion in the U.S.The spot exchange rate is £1.00 = $2.00.Firm A can borrow dollars at $10% and pounds sterling at 12%.Firm B can borrow dollars at 9% and pounds sterling at 11%.Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk.

Accepted Answer

A) There is no mutually beneficial swap that has neither party facing exchange rate risk. 
B) Firm A should borrow $4 million in dollars,pay 11% in pounds to Firm B,who in turn borrows 2 million pounds and pays 8% in dollars to A. 
C) Firm A should borrow $2 million in dollars,pay 11% in pounds to Firm B,who in turn borrows 4 million pounds and pays 8% in dollars to A. 
D) Firm A should borrow $4 million in dollars,pay 11% in pounds to Firm B,who in turn borrows 2 million pounds and pays 10% in dollars to A.

Question 13

Suppose that the swap that you proposed in question 2 is now 4 years old (i.e.there is exactly one year to go on the swap).If the spot exchange rate prevailing in year 4 is $1.8778 = €1 and the 1-year forward exchange rate prevailing in year 4 is $1.95 = €1,what is the value of the swap to the party paying dollars? If the swap were initiated today the correct rates would be as shown:  Consider the situation of firm A and firm B.The current exchange rate is $1.50/€.Firm A is a U.S.MNC and wants to borrow €40 million for 2 years.Firm B is a French MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown; both firms have AAA credit ratings.

Accepted Answer

The answer of Suppose that the swap that you proposed...

Question 14

In an interest-only currency swap

Accepted Answer

A) the counterparties must raise the actual notational principal in their home markets; then exchange it for the foreign currency they desire.They must also hedge with forward contracts on the currency. 
B) the counterparties periodically exchange the amortized portions of the notational principals. 
C) both a) and b) 
D) none of the above

Question 15

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 SFr10,000,000 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%.

Accepted Answer

A) SFr248,685 
B) SFr900,000 
C) SFr2,700,000 
D) SFr7,300,000

Question 16

Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

Accepted Answer

The answer of Devise a direct swap for A and...

Question 17

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

Accepted Answer

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

Question 18

When a swap bank serves as a dealer:

Accepted Answer

A) The swap bank stands willing to accept either side of a swap. 
B) The swap bank matches counterparties but does not assume any risk of the swap. 
C) The swap bank receives a commission for matching buyers and sellers. 
D) None of the above

Question 19

Consider bank that has entered into a five-year swap on a notational balance of $10,000,000 with a corporate customer who has agreed to pay a fixed payment of 10 percent in exchange for LIBOR.As of the fourth reset date,determine the price of the swap from the bank's point of view assuming that the fixed-rate side of the swap has increased to 11 percent.LIBOR is at 5 percent.

Accepted Answer

A) $909,090.91 gain. 
B) $90,090.09 loss. 
C) No loss or no gain since maturity has not arrived. 
D) $90,090.09 gain.

Question 20

What would be the interest rate?

Accepted Answer

The answer of What would be the interest rate?...

Exam 14: Interest Rate and Currency Swaps

A major risk faced by a swap dealer is exchange rate risk.This is

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

What are the IRP 1-year and 2-year forward exchange rates?

Find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent.

Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan.

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

A major risk faced by a swap dealer is sovereign risk.This is

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

In an interest-only currency swap

Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

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

When a swap bank serves as a dealer:

What would be the interest rate?