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

In a currency swap

Accepted Answer

A) it may be the case that two counterparties have equivalent credit ratings. 
B) it may be the case that firms have a comparative advantage in borrowing in their domestic markets. 
C) both a and b 
D) none of the above

Question 3

An interest-only currency swap has a remaining life of 18 months. It involves exchanging interest at 14% on £20 million for interest at 10% on $14 million once a year. The term structure of interest rates is currently flat in both the U.S. and in the U.K. If the swap were negotiated today the interest rates exchanged would be $8% and £11%. All rates were quoted with annual compounding. The current exchange rate is $1.95 = £1. What is the value of the swap to the party paying dollars?

Accepted Answer

The answer of An interest-only currency swap has a remaining...

Question 4

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow £5,000,000 fixed for 5 years. The exchange rate is $2 = £1 and is not expected to change over the next 5 years. Their external borrowing opportunities are:  A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. In order for X and Y to be interested, they can face no exchange rate risk  What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y?

Accepted Answer

A) A = $10.50%; B = £12%. 
B) A = $10%; B = £13%. 
C) A = $12%; B = £13%. 
D) A = £10.50%; B = $12%.

Question 5

Explain how this opportunity affects which swap firm B will be willing to participate in.

Accepted Answer

The answer of Explain how this opportunity affects which swap...

Question 6

Suppose that you are a swap bank and you notice that interest rates on coupon bonds are as shown. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. The current spot exchange rate is $1.50 per €1.00. The size of the swap is €40 million versus $60 million.  In other words, what you be willing to pay in euro against receiving USD LIBOR?

Accepted Answer

A) 7% 
B) 6% 
C) 5% 
D) None of the above

Question 7

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 8

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent. The 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 9

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: Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of rate of 9.90%.in exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR - 0.15%; What is the value of this swap to company Y?

Accepted Answer

A) Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year. 
B) Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year. 
C) Company Y will save 5 basis points per year on $10,000,000 = $5,000 per year. 
D) Company Y will only break even on the deal.

Question 10

Compute the payments due in the second year on a three-year AMORTIZING swap from company B to company

Accepted Answer

A) B pays £402,114.80 to A 
A)  Company A and company B both want to borrow £1,000,000 for three years. A wants to borrow floating and B wants to borrow fixed. A and B agree to split the QSD.   
B)  B pays £100,000 to A 
C)  B pays £69,788.52 to A 
D)  None of the above

Question 11

Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 7% USD loan into a 2-year euro denominated loan.

Accepted Answer

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

Question 12

Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and promise to make at least 20bp for your firm.

Accepted Answer

The answer of Act as a swap bank and quote...

Question 13

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 14

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 is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat.  Assume both X and Y agree to the swap bank's terms. Fill in the values for A, B, C, D, E, & F on the diagram.

Accepted Answer

A) A = LIBOR; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = 12% 
B) A = 10%; B = 10.45%; C = 10.05%; D = LIBOR; E = LIBOR; F = LIBOR + 1½% 
C) A = 10%; B = 10.45%; C = LIBOR; D = LIBOR; E = 10.05%; F = LIBOR + 1½% 
D) A = 10%; B = LIBOR; C = LIBOR; D = 10.45%; E = 10.05%; F = LIBOR + 1½%

Question 15

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 16

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. The 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 17

Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time. Company X has a AAA credit rating, but company Y's credit standing is considerably lower.

Accepted Answer

A) Company X should demand most of the QSD in any swap with Y as compensation for default risk. 
B) Since Y has a poor credit rating, it would not be a participant in the swap market. 
C) Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation. 
D) both a and c

Question 18

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:

Accepted Answer

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 the above

Question 19

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, a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR:  The firms external borrowing opportunities are:

Accepted Answer

A) Firm A does 2 swaps with the swap bank, $ at bid and € at ask. Firm B does 2 swaps with the swap bank, $ at ask and € at bid. Firms A and B would each save 90bp and the swap bank would earn 20bp. 
B) There is no mutually beneficial swap at these prices. 
C) Firm A does 2 swaps with the swap bank, $ at ask and € at bid. Firm B does 2 swaps with the swap bank, $ at bid and € at ask. Firms A and B would each save 90bp and the swap bank would earn 20bp. 
D) None of the above

Question 20

Swaps are said to offer market completeness

Accepted Answer

A) This means that all types of debt instruments are not regularly available for all borrowers. Thus interest rate swap markets assist in tailoring financing to the type desired by a particular borrower. 
B) In that the swap market offers price discovery to the market. 
C) Because you can trade across both currencies and fixed and floating market segments. 
D) None of the above

Exam 14: Interest Rate and Currency Swaps