honeycfa

Which of the following statements about a currency swap is least accurate?

A) The periodic interest payments are exchanged in full each period.

B) Notional principal is exchanged at the termination of the swap.

C) Most currency swaps are done to exploit market inefficiencies.

---

Unlike interest rate swaps, notional principal is swapped at both the initiation and the termination of the swap. Full interest payments are exchanged at each settlement date. Exploiting market inefficiencies was once a motivation for currency swaps, but it is not today (because the market is efficient). Today motivations range from reducing transactions costs to maintaining privacy to avoiding regulation.

honeycfa

Which of the following statements about notional principal in plain vanilla interest rate swaps is least accurate? Notional principal:

A) is used to calculate the fixed rate interest payment; the swap's market value is used to calculate the floating rate payment.

B) is not exchanged by the counterparties.

C) does not vary during the swap tenor.

---

The notional amount is used to calculate both the fixed and the floating rate payment streams. Both of the other choices are true.

honeycfa

Which of the following is NOT considered a reason for using the swaps market? To:

A) reduce transactions costs.

B) maintain privacy.

C) exploit market inefficiencies.

---

Historically, the two basic motivations for swaps were to exploit market inefficiencies and attempt to achieve cheaper financing. Today, the swaps market has matured and now offers few arbitrage opportunities to exploit market inefficiencies. In addition to seeking cheaper financing, current reasons for using swaps include reducing transactions costs, avoiding costly regulations, and maintaining privacy.

honeycfa

All of the following are ways to exit a swap contract EXCEPT:

A) entering an offsetting swap with the original counterparty.

B) selling a swaption.

C) making a cash payment to the original counterparty.

---

Selling a swaption gives the seller an obligation to enter into a swap if the swaption is exercised. To exit a swap, the entity would want to buy the swaption.

honeycfa

An offsetting swap is a swap that:

A) reduces the credit risk of an earlier swap.

B) is opposite to an existing swap in cash flows.

C) reduces the principal amount of a swap.

---

An offsetting swap is a swap with opposite cash flows to an existing swap. It is one way to exit a swap position, just as an offsetting trade is used to close out a futures position.

honeycfa

The least likely way to terminate a swap agreement prior to expiration is to:

A) make/receive a payment to/from the original counterparty.

B) exercise a swaption.

C) sell the swap.

---

There is no functioning secondary market in swaps; selling a swap would be unusual and would require the permission of the counterparty.