soverby

A payer swaption gives its holder:

A) an obligation to enter a swap in the future as the fixed-rate payer.

B) the right to enter a swap in the future as the fixed-rate payer.

C) the right to enter a swap in the future as the floating-rate payer.

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A payer swaption give its holder the right to enter a swap in the future as the fixed-rate payer.

soverby

The writer of a receiver swaption has:

A) an obligation to enter a swap in the future as the fixed-rate payer.

B) the right to enter a swap in the future as the floating-rate payer.

C) an obligation to enter a swap in the future as the floating-rate payer.

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A receiver swaption gives its owner the right to receive fixed, the writer has an obligation to pay fixed.

invic

Mark Roberts anticipates utilizing a floating rate line of credit in 90 days to purchase $10 million of raw materials. To get protection against any increase in the expected London Interbank Offered Rate (LIBOR) yield curve, Roberts should:

A) buy a receiver swaption.

B) buy a payer swaption.

C) write a receiver swaption.

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A payer swaption will give Roberts the right to pay a fixed rate below market if rates rise

invic

An investor who anticipates the need to exit a pay-fixed interest rate swap prior to expiration might:

A) buy a payer swaption.

B) sell a payer swaption.

C) buy a receiver swaption.

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A receiver swaption will, if exercised, provide a fixed payment to offset the investor’s fixed obligation, and allow him to pay floating rates if they decrease.

invic

Which of the following statements regarding swaptions is least accurate? A swaption is often used to:

A) create a synthetic bond position.

B) hedge the rate on an anticipated swap transaction.

C) provide the right to terminate a swap.

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A swaption is like an option on a bond with payments equal to the fixed payments on the swap. The others are common uses of swaps.

invic

Which of the following is least likely to be a use of a swaption?

A) Exiting an offsetting swap at the exercise date.

B) Hedging the risk of a current fixed-rate commitment.

C) Hedging the risk of an anticipated floating-rate obligation.

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Swaptions will not be a good hedge for a current obligation since the swaption is for a swap in the future.

invic

Wanda Brunner, CFA, is contemplating adding a swaption to her portfolio. Which of the following is least likely her goal?

A) interest rate speculation.

B) provide short-term liquidity.

C) lock in a fixed rate.

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The three primary uses of swaptions are to lock in a fixed rate, interest rate speculation, and swap termination.

invic

Wanda Brunner, CFA, is contemplating adding a swaption to her portfolio. Which of the following is least likely her goal?

A) interest rate speculation.

B) provide short-term liquidity.

C) lock in a fixed rate.

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The three primary uses of swaptions are to lock in a fixed rate, interest rate speculation, and swap termination.

invic

Consider a 3-year quarterly-pay bond to be issued in 180 days with a 7% coupon. A 180-day put option on this bond, with an exercise price rate of 7%, has a payoff equal to that of a:

A) receiver swap.

B) receiver swaption.

C) payer swaption.

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The payoff on a payer swaption is equivalent to that of a put option on a bond as described in the question.

invic

Wanda Brunner, CFA, is contemplating adding a swaption to her portfolio. She makes the following two statements about the possible payoffs and cash flows of an interest rate swaption:

Statement 1:	Exercising an in-the-money swaption effectively generates an annuity over the term of the underlying swap.
Statement 2:	A positive payoff to a receiver swaption each quarter is the interest saved by receiving the higher fixed rate.

Which of the following statements are CORRECT?

A) Both statements are correct.

B) Only statement 1 is correct.

C) Only statement 2 is correct.

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Exercising an in-the-money swaption effectively generates an annuity over the term of the underlying swap. The amount of each annuity payment is the interest savings that result from paying a rate lower than the market rate under a payer swaption or the extra interest that results from receiving a higher rate under a receiver swaption.