Deck 12: Swaps

Question 1

Consider a swap to pay currency A floating and receive currency B floating. What type of swap would be combined with this swap to produce a swap to produce a plain vanilla swap in currency B.

A) pay currency B floating, receive currency A fixed
B) pay currency B fixed, receive currency A floating
C) pay currency B fixed, receive currency A fixed
D) pay currency B floating, receive currency A floating
E) none of the above

Answer 1

B

Question 2

Use the information in problem 16 to find the fixed rate on an equity swap in which the stock index is at 2,000.

A) 5.9 percent
B) 5 percent
C) 6 percent
D) 2.95 percent
E) 3.5 percent

Answer 2

A

Question 3

Find the approximate upcoming net payment on an equity swap in which party A pays the return on stock index 1 and party B pays the return on stock index 2. The notional amount is $25 million. Stock index 1 starts the period at 1500 and goes up to 1600 at the end of the period. Stock index 2 starts the period at 3500 and goes up to 3300 at the end of the period.

A) The party paying index 1 pays about $238,000
B) The party paying index 2 pays about $238,000
C) The party paying index 2 pays about $3.095 million
D) The party paying index 1 pays about $25 million
E) The party paying index 1 pays about $3.095 million

Answer 3

E

Question 4

An interest rate swap with both sides paying a floating rate is called a

A) plain vanilla swap
B) two-way swap
C) floating swap
D) spread swap
E) basis swap

Question 5

To determine the fixed rate on a swap, you would

A) use put-call parity
B) price it as the issuance of a fixed rate bond and purchase of a floating rate bond or vice versa
C) use the same fixed rate as that of a zero coupon bond of equivalent maturity
D) use the continuously compounded rate for the shortest maturity bond
E) none of the above

Question 6

Find the fixed rate on a plain vanilla interest rate swap with payments every 180 days (assume a 360-day year) for one year. The prices of Eurodollar zero coupon bonds are 0.9756 (180 days) and 0.9434 (360 days).

A) 5.9 percent
B) 5 percent
C) 6 percent
D) 5.5 percent
E) 2.95 percent

Question 7

Which of the following statements about constant maturity swaps is not true?

A) the CMT rate is linked to a U. S. treasury security of equivalent maturity
B) the typical maturity is 2 to 5 years
C) the maturity is constant
D) one rate is based on a security of a longer rate than the settlement period
E) the swap is a type of interest rate swap

Question 8

The most basic and common type of swap is called

A) basis swap
B) plain vanilla swap
C) plain paper swap
D) commercial swap
E) bond swap

Question 9

Find the market value of a plain vanilla swap from the perspective of the fixed rate payer in which the upcoming payment is in 30 days, and there is one more payment 180 days after that. The fixed rate is 7 percent and the upcoming floating payment is at 6.5 percent. The notional amount is $15 million. Assume 360 days in a year. The prices of Eurodollar zero coupon bonds are 0.9934 (30 days) and 0.9528 (210 days).

A) the fixed payer pays $31,763.75
B) the fixed payer pays $71,527.50
C) the floating payer pays $49,500
D) the floating payer pays $194,228
E) none of the above

Question 10

Find the net payment on an equity swap in which party A pays the return on a stock index and party B pays a fixed rate of 6 percent. The notional amount is $10 million. The stock index starts off at 1,000 and is at 1,055.15 at the end of the period. The interest payment is calculated based on 180 days in the period and 360 days in the year.

A) party B pays $851,500
B) parry B pays $48,500
C) party B pays $251,500
D) party A pays $251,500
E) party A pays $851,500

Question 11

A currency swap without the exchange of notional amount is most likely to be used in what situation?

A) a company issuing a bond
B) a company generating cash flows in a foreign currency
C) a company arranging a loan
D) a dealer trying to hedge a currency option
E) none of the above

Question 12

Find the upcoming net payment in a plain vanilla interest rate swap in which the fixed party pays 10 percent and the floating rate for the upcoming payment is 9.5 percent. The notional amount is $20 million and payments are based on the assumption of 180 days in the payment period and 360 days in a year.

A) fixed payer pays $1,950,000
B) fixed payer pays $950,000
C) floating payer pays $1 million
D) floating payer pays $50,000
E) fixed payer pays $50,000

Question 13

Which of the following is not a way to terminate a swap:

A) the two counterparties cash settle the market value
B) enter into an opposite swap with another counterparty
C) hold the swap to its maturity date
D) use a forward contract or option on the swap to enter into an offsetting swap
E) borrow the notional amount and pay off the counterparty

Question 14

Interest rate swap payments are made

A) on the last day of the quarter
B) on the first day of each month
C) at whatever dates are agreed upon by the counterparties
D) on the 15th of the agreed-upon months
E) on the last day of the month

Question 15

Which of the following is not a type of swap?

A) settlement swaps
B) commodity swaps
C) interest rate swaps
D) equity swaps
E) currency swaps

Question 16

The underlying amount of money on which the swap payments are made is called

A) settlement value
B) market value
C) notional amount
D) base value
E) equity value

Question 17

For a currency swap with $10 million notional amount, the notional amount in British pounds if the exchange rate is $1.55 is (approximately)

A) ₤11.55 million
B) ₤15.5 million
C) ₤10 million
D) ₤6.45 million
E) none of the above

Question 18

Find the upcoming payment interest payments in a currency swap in which party A pays U. S. dollars at a fixed rate of 5 percent on notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4 percent on notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year, and there is no netting.

A) party A pays $2,500,000, and party B pays SF1,400,000
B) party A pays SF1,400,000, and party B pays $2,500,000
C) party A pays SF1,750,000, and party B pays SF1,400,000
D) party A pays $2,500,000, and party B pays $2,000,000
E) party A pays $50 million, and party B pays SF35 million

Question 19

The difference between the swap rate and the rate on a Treasury security of the same maturity is called the

A) swap spread
B) risk premium
C) swap basis
D) settlement spread
E) LIBOR

Question 20

Which of the following distinguishes equity swaps from currency swaps?

A) equity swap payments are always hedged
B) equity swap payments are made on the first day of the month
C) equity swap payments can be negative
D) equity swap payments have more credit risk
E) none of the above

Question 21

Swap payments are always either fixed or floating but never both.

Question 22

An equity swap with fixed interest payments has two payments remaining. The first occurs in 30 days and the second occurs in 210 days. The discount factors are 0.9934 (30 days) and 0.9528 (210 days). The upcoming fixed payment is at 4 percent and is based 180 days in a 360-day year. The equity index was at 1150 at the beginning of the period and is now at 1152.75. The notional amount is $60 million. Find the approximate value of the equity swap from the perspective of the party making the equity payment and receiving the fixed payment.

A) $143,478
B) $642,000
C) -$143,478
D) -$642,000
E) -$496,560

Question 23

The value of a pay-fixed, receive-floating interest rate swap is found as the value of a

A) floating-rate bond minus the value of a fixed-rate bond.
B) fixed-rate bond minus the value of a floating-rate bond.
C) floating-rate bond minus the value of another floating-rate bond.
D) fixed-rate bond minus the value of another fixed-rate bond.
E) none of the above correctly identify how this value is found.

Question 24

Interest rate swap volume is greater than currency swap volume because virtually ever business is exposed to interest rate risk.

Question 25

A basis swap is priced by adding a spread to the higher rate or subtracting a spread from the lower rate. This spread is found as

A) the difference between the floating rate on a plain vanilla swap based on one of the rates and the fixed rate on a plain vanilla swap based on the other rate.
B) the addition of the fixed rate on a plain vanilla swap based on one of the rates and the fixed rate on a plain vanilla swap based on the other rate.
C) the difference between the fixed rate on a plain vanilla swap based on one of the rates and the fixed rate on a plain vanilla swap based on the other rate.
D) the difference between the floating rate on a plain vanilla swap based on one of the rates and the floating rate on a plain vanilla swap based on the other rate.
E) none of the above correctly explain how this spread is found

Question 26

The present value of the series of dollar payments in a currency swap per $1 notional amount is $0.03. The present value of the series of euro payments in the same currency swap per €1 is €0.0225. The current exchange rate is $1.05 per euro. If the swap has a notional amount of $100 million and €105 million, find the market value of the swap from the perspective of the party paying euros and receiving dollars.

A) $519,375
B) -$2,480,625
C) $3,000,000
D) -$3,000,000
E) -$519,375

Question 27

The value of a floating-rate bond is par on each interest payment date.

Question 28

The market value of a swap is zero between settlement dates.

Question 29

In an interest rate swap, the upcoming floating payment will not be determined until the end of the current settlement period.

Question 30

The notional amount is never exchanged in an interest rate swap.

Question 31

In an index amortizing swap, the notional amount increases throughout the life of the swap.

Question 32

Equity swaps can be used for all of the following except:

A) to synthetically buy stock
B) to synthetically sell stock
C) to convert dividends into capital gains
D) to synthetically re-align an equity portfolio
E) none of the above

Question 33

Swap payments typically involve adjusting for the fraction of the year in some fashion. This adjustment is known as

A) the compounding convention
B) the accrual period
C) the fraction convention
D) the money market convention
E) the payment period

Question 34

A company that borrows at a floating rate and uses a swap to convert into a fixed rate is assuming some credit risk.

Question 35

A swap involving two floating rates is called a basis swap.

Question 36

The value of a pay-fixed, receive floating interest rate swap is found as the value of a

A) floating-rate bond times the value of a fixed-rate bond.
B) floating-rate bond plus the value of a fixed-rate bond.
C) floating-rate bond minus the value of another floating-rate bond.
D) fixed-rate bond minus the value of another fixed-rate bond.
E) floating-rate bond minus the value of a fixed-rate bond.

Question 37

Interest rate swaps can be used for all of the following purposes except:

A) to borrow at the prime rate
B) to convert a fixed-rate loan into a floating-rate loan
C) to convert a floating-rate loan into a fixed-rate loan
D) to speculate on interest rates
E) to hedge interest rate risk

Question 38

Which of the following statements about diff swaps is true?

A) they involve interest payments in separate currencies
B) they are based on the difference between interest rates in two countries
C) they are based on the difference between interest rates of different maturities
D) the notional amount reduces throughout the life of the swap
E) the notional amount increases throughout the life of the swap

Question 39

Currency swap volume is greater than equity swap volume.

Question 40

The combination of a pay euro fixed and receive dollar fixed swap with a pay dollar floating and receive euro fixed results in

A) a currency swap
B) a currency swap, receive euro fixed and pay euro floating
C) an interest rate swap, pay dollar fixed and receive dollar floating
D) an interest rate swap, receive euro fixed and pay euro floating
E) an interest rate swap, pay dollar floating and receive dollar fixed

Question 41

A strategy to replicate an equity swap involving two stock indices is to buy one index and sell short the other.

Question 42

A currency swap with no notional amount can be used to synthetically convert a bond issued in one currency into a bond issued in another currency.

Question 43

Pricing a currency swap means to find the fixed rates in the two currencies. These fixed rates are the same as the fixed rates on plain vanilla swaps in the respective currencies.

Question 44

The fixed rates on a currency swap are the same as the fixed rates on plain vanilla interest rate swaps in the respective currencies.

Question 45

If a swap is effectively terminated by entering into the opposite swap with another counterparty, the credit risk will be eliminated.

Question 46

A plain vanilla interest rate swap is equivalent to issuing a fixed-rate bond and using the proceeds to buy a floating-rate bond or vice versa.

Question 47

The level of the stock is irrelevant to the pricing of equity swaps.

Question 48

Currency swaps can be viewed as a pair of bonds with each bond denominated in a different currency.

Question 49

Like interest rate and currency swaps, equity swap payments are always positive.

Question 50

At the beginning of the life of the swap, the present values of the two stream of payments of each counterparty is the same.

Question 51

A swap can be terminated by having the party owing the greater amount make a cash payment.

Question 52

Since 1998, the gross market value of currency swaps outstanding has always increased each year.

Question 53

By adding a hypothetical notional amount to a swap, one can treat the cash flows like those of a bond.

Question 54

Since 1998, the notional amount of interest rate swaps outstanding has always increased each year.

Question 55

A risk of equity swaps is that the company will pay dividends.

Question 56

Swaps are created in the over-the-counter market.

Question 57

Interest rate swaps can be viewed as a portfolio of forward contracts.

Question 58

The settlement period in a swap refers to the full life of the swap.

Question 59

An interest rate swap is a special case of a currency swap with both currencies being the same.

Question 60

Currency swaps can result in savings for a party due to the assumption of credit risk.