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A swap is equivalent to a series of:

A) interest rate calls.

B) off-market FRAs.

C) FRAs priced at market rates.

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Since the fixed rate on the swap is the same at every settlement date, a series of FRAs at those fixed rates will have values that differ from zero to the extent the fixed rate and the zero-value rate differ. This makes them off-market FRAs.

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Suppose a forward rate agreement (FRA) calls for the exchange of six-month LIBOR one year from now for a payment of a fixed rate of interest of 8%. In other words, pay floating and receive fixed. Which of the following structures is equivalent to this FRA? A long:

A) call and a short put on LIBOR with a strike rate of 8% and twelve months to expiration.

B) put and a short call on LIBOR with a strike rate of 8% and twelve months to expiration.

C) call and a short put on LIBOR with a strike rate of 8% and six months to expiration.

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The strike rate of the options corresponds to the fixed rate of the FRA. The expiration of the option coincides with the LIBOR determination date.

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The floating-rate payer in a simple interest-rate swap has a position that is equivalent to:

A) issuing a floating-rate bond and a series of long FRAs.

B) a series of short FRAs.

C) a series of long forward rate agreements (FRAs).

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The floating-rate payer has a liability/gain when rates increase/decrease above the fixed contract rate; the short position in an FRA has a liability/gain when rates increase/decrease above the contract rate.

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Which of the following is equivalent to a pay-fixed swap with a tenor of two years with semi-annual swap payments and a fixed rate of 6% (exchanged for LIBOR)? The notional principal is $100,000,000.

A) A forward rate agreement, which obligates the party to pay a fixed rate of 6% and receive six-month LIBOR on a notional principal of $100,000,000.

B) A strip of three forward rate agreements, which obligates the party to pay a fixed rate of 6% and receive six-month LIBOR on a notional principal of $100,000,000.

C) A strip of two forward rate agreements, which obligates the party to pay a fixed rate of 6% and receive six-month LIBOR on a notional principal of $100,000,000.

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In an interest rate swap, the first payment is known with certainty and will be made at month 6. The determination dates for the floating rate will be at months 6, 12, and 18 and the corresponding payment dates will be at months 12, 18, and 24. These correspond to the three forward rate agreements.

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Which of the following is equivalent to a plain vanilla receive fixed currency swap?

A) A short position in a foreign bond coupled with a long position in a dollar-denominated floating rate note.

B) A long position in a foreign bond coupled with the issuance of a dollar-denominated floating rate note.

C) A short position in a foreign bond coupled with the issuance of a dollar-denominated floating rate note.

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A long position in a fixed rate foreign bond will receive fixed coupons denominated in a foreign currency. The short floating rate note requires U.S. dollar denominated floating-rate payments. Combined, these are the same cash flow as a plain vanilla currency swap.

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Which of the following is equivalent to a plain vanilla receive-fixed interest rate swap?

A) A short position in a bond coupled with a long position in a floating rate note.

B) A long position in a bond coupled with the issuance of a floating rate note.

C) A short position in a bond coupled with the issuance of a floating rate note.

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A long position in a fixed rate bond pays fixed coupons. The short floating rate note requires floating-rate payments. Together, these are the same cash flow as a receive-fixed swap.

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A plain vanilla interest-rate swap to the fixed-rate payer is equivalent to issuing a fixed-rate bond and:

A) selling a series of interest rate puts.

B) buying a floating-rate bond.

C) selling a series of interest rate calls.

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Paying fixed and receiving floating in a swap is equivalent to issuing a fixed-rate bond and investing the proceeds in a floating rate bond.

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If the one year spot rate is 5%, the two-year spot rate is 5.5%, and the three year spot rate is 6%, the fixed rate on a 3-year annual pay swap is closest to:

A) 1.99%.

B) 4.50%.

C) 5.65%.

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The fixed rate on the swap is:

= 0.1525 / 2.7008 = 0.0565

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A U.S. firm (U.S.) and a foreign firm (F) engage in a four year plain-vanilla annual pay currency swap. The U.S. firm pays fixed in the FC and receives floating in dollars. The fixed rate at initiation and at the end of the swap was 5%. The variable rate at the end of year 1 was 4%, at the end of year 2 was 6%, and at the end of year 3 was 7%. At the beginning of the swap, $2 million was exchanged at an exchange rate of 2 foreign units per $1. At the end of the swap period the exchange rate was 1.75 foreign units per $1.
At the end of year 3, firm F will pay firm U.S.:

A) 280,000 foreign units.

B) $140,000.

C) $120,000.

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A plain-vanilla currency swap pays floating on dollars and fixed on foreign. The floating rate cash flows on the settlement date are based on the previous period's ending floating interest rate 0.06 x $2,000,000 = $120,000.

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A $10 million 1-year semi-annual-pay LIBOR-based interest-rate swap was initiated 90 days ago when LIBOR was 4.8%. The fixed rate on the swap is 5%, current 90-day LIBOR is 5% and 270-day LIBOR is 5.4%. The value of the swap to the fixed-rate payer is closest to:

A) $15,633.

B) $19,229.

C) $12,465.

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The fixed rate payments are 0.05 × (180/360) × 10,000,000 = 250,000. The present value of the remaining payments are 250,000/(1 + 0.05 × (90/360)) + 10,250,000/(1+ 0.054 × (270/360)) = $10,097,947. The floating payment in 90 days is 0.048 × (180/360) = 240,000 and the present value is 240,000/(1 + 0.05/4) = $237,037. The second floating-rate payment combined with 1 at the end of the swap has a present value of 1 on the first payment date. The present value of 1 is 1/(1 + 0.05 × (90/360)) = 0.987654321 so the present value of the second floating rate payment combined with the principal amount is $9,876,543. The total value is 9,876,543 + 237,037 = $10,113,580.
The value of the swap to the fixed-rate payer is 10,113,580 – 10,097,947 = $15,633