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发表于 2012-4-2 13:01
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Morgan Hutchinson is a senior vice president of Global Swapsbank, Ltd., a multi-national banking corporation with prominent and international presence as a swaps dealer. Global Swapsbank deals in both interest rate swaps and commodity swaps and maintains offices on 5 continents and in more than 60 countries.
Among major financial market participants, concern has been growing about global economic conditions. Financial markets are declining. Economic growth is slowing. Odds of a recession are rising. In this environment, the economics division of Global Swapsbank has put the senior management of the firm on notice about potential changes in interest rates and commodity prices.
This economic concern has become sufficiently significant that the board of directors of Global Swapsbank has taken notice. They recognize that their projections for the firm’s upcoming fiscal year will not be met if the potential downturn in the global economy becomes a reality.
The board responded to this concern by charging Hutchinson with assessing the impact of the changing economic situation on the financial risk and obligations of Global Swapsbank with respect to its swap division. The board has also tasked him with determining whether changing global economic environment may affect demand for swaps and cause a shift in revenue growth projections for Global Swapsbank.
Hutchinson has asked for a meeting with Graciela Swanson, one of the firm’s senior global economists. They collaborate to analyze the impact of the economics division’s various possible scenarios on the performance of the swaps division.
Hutchinson briefs Swanson on the reasons for Global Swapsbank’s concerns. He explains to her:
Statement 1: We are very concerned about the impact of economic changes on current market conditions because the value of a commodity swap can change in response to market prices, forward prices or interest rates.
Statement 2: We have not been concerned about possible changes in the creditworthiness of the various counterparties in the event of deteriorating economic conditions because financially settled swaps eliminate credit risk.
Swanson asks Hutchinson what the major sources of swap revenue are to the firm. He explains that Global Swapsbank does a substantial amount of business in prepaid swaps. The firm has a wide-ranging client list among recurring buyers of prepaid swaps, and consequently the revenue of the firm depends significantly on the attractiveness of a prepaid swap to the buyer.
Hutchinson explains the buyer perspective on prepaid swaps to Swanson. He tells her, “The buyer of a prepaid swap faces both market risk from changes in forward prices and financial risk that changes in interest rates could lead to an increase in the settlement cost of the swap.”
Swanson pursues the discussion of prepaid swaps. However, she changes the focus to credit risk. Swanson points out to Hutchinson, “The swap division does need to consider credit risk in the event of deteriorating economic conditions because the buyer of a prepaid swap faces credit risk that the counterparty will not deliver the commodity.”
Hutchinson points out, “Credit risk can be removed from a commodity swap if the counterparties hedge with an appropriate interest rate swap. That might increase demand for swap transactions for Global Swapsbank.” Swanson suggests, “Hedging commodity transactions requires addressing the seasonality of commodity prices, which can be done by including either a varying quantity or a varying price component into the swap agreement.” Swanson and Hutchinson agree that Global Swapsbank should ensure that its swap agreements going forward include appropriate terms to hedge expected commodity risk.
Is Hutchinson correct in his statements about the risks to a buyer of a prepaid swap?A)
| Both statements are correct. |
| B)
| Neither statement is correct. |
| C)
| Only one statement is correct. |
|
Hutchinson is correct with regard to Statement 1 that commodity swaps are responsive to changes in market or forward prices and to interest rates. Hutchinson is incorrect with regard to Statement 2 because, although there is less credit risk in financially settled swaps, the credit risk can go back and forth between the counterparties during the life of the swap as the value of the swap changes. (Study Session 13, LOS 37.a)
At inception and ignoring fees, the swap prices of a commodity swap and an interest rate swap have a market value of:A)
| greater than zero for both. |
| B)
| greater than zero for only one of the swaps. |
| |
The swap rate and swap price for both an interest rate swap and a commodity swap have a value of zero at inception. (Study Session 13, LOS 37.a)
Are Hutchinson and Swanson correct in their statements about the risks to a buyer of a prepaid swap?
Hutchinson is incorrect. The buyer of a prepaid swap does face both market risk and financial risk, but the source of the financial risk is the opportunity cost of the prepaid price, not a change in the settlement price. Swanson is correct that buyers do face credit risk in prepaid swaps that the counterparty will not deliver the commodity. (Study Session 13, LOS 37.a)
Regarding an annual reset commodity swap and an accreting interest rate swap, which one if any will the notional principal likely vary?
The notional principle may vary in a commodity swap that settles more than once per year, but that is unlikely in one that settles annually. The notional principle of an accreting interest rate swap increases over time. (Study Session 13, LOS 37.a)
Are Hutchinson and Swanson correct in their statements about the hedging and commodity swaps?
Both Hutchinson and Swanson are incorrect. Hedging a commodity swap with an appropriate interest rate swap removes non-credit risk, not credit risk. Hedging commodity transactions requires addressing the seasonality of commodity prices, which can be done by including both a varying quantity and a varying price component into the swap agreement, not either/or. (Study Session 13, LOS 37.a)
Will the value of a commodity swap or interest rate swap change over time if market rates and prices do not change?
The value of either type of swap will change over time even if market rates and prices do not change since the swap value represents the present value of a stream of cash flows. (Study Session 13, LOS 37.a) |
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