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标题: Derivatives【Reading 64】Sample [打印本页]
作者: hinsafdar    时间: 2012-4-1 11:04     标题: [2012 L1] Derivatives【Session 17 - Reading 64】Sample

Which of the following is NOT considered a reason for using the swaps market? To:
A)
reduce transactions costs.
B)
exploit market inefficiencies.
C)
maintain privacy.


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.
作者: hinsafdar    时间: 2012-4-1 11:05

Which of the following statements about notional principal in plain vanilla interest rate swaps is least accurate? Notional principal:
A)
is not exchanged by the counterparties.
B)
is used to calculate the fixed rate interest payment; the swap's market value is used to calculate the floating rate payment.
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.
作者: hinsafdar    时间: 2012-4-1 11:05

Which of the following statements about a currency swap is least accurate?
A)
The periodic interest payments are exchanged in full each period.
B)
Most currency swaps are done to exploit market inefficiencies.
C)
Notional principal is exchanged at the termination of the swap.


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.
作者: hinsafdar    时间: 2012-4-1 11:06

Which transaction would least likely be classified as an interest rate swap?
A)
Receive AUD fixed, pay NZD floating.
B)
Receive U.S. fixed, pay U.S. commercial paper.
C)
Pay USD fixed, receive U.S. LIBOR.


Because it involves two different currencies, this would be a currency swap.
作者: hinsafdar    时间: 2012-4-1 11:06

Which of the following statements involving a plain vanilla interest rate swap is least accurate? In a plain interest rate swap, the:
A)
counterparty who receives the fixed payment by agreeing to pay variable rate interest is called the receive-fixed side of the swap.
B)
parties generally agree to swap the notional principal.
C)
parties involved in the swap agreement are called counterparties.


The notional principal is the dollar amount specified in the swap agreement. The counterparties use the notional principal to determine the amount of the interest payments. They generally do not exchange the notional principal.
作者: hinsafdar    时间: 2012-4-1 11:07

Which of the following statements about swaps is least accurate?
A)
The notional principal is swapped at the beginning and end of a currency swap.
B)
Motivations to engage in swaps include reducing transaction costs and maintaining privacy.
C)
The notional principal is swapped at the beginning of an interest rate swap.


In interest rate swaps, there is no need to actually exchange the notional amount, since the notional principal swapped is the same for both counterparties and in the same currency units. Net interest is paid by the one who owes it at settlement dates.
Explanations for other responses:
The reasons given now for using the swap markets are to: reduce transactions costs, avoid costly regulations, and maintain privacy. Historically, there were two basic motivations for swaps: to exploit perceived market inefficiencies and to attempt to obtain cheaper financing. Both of these motivations are based on the concept that the financial markets are inefficient. This fact, unfortunately, is no longer true.  Today, the swap markets are mature and offer few arbitrage opportunities. Swap markets are now viewed as being more operationally efficient and a more flexible means of packaging and transforming cash flows than any other method. Currency swaps often occur because of comparative advantage. For example, parties may want to reduce borrowing costs. One firm may have better access to a country’s domestic capital markets than another firm. The U.S. firm (D) may have access to the U.S. capital markets but not the German markets, while the German firm (M) may have access to the German markets but not the U.S. markets. If each firm borrows locally and then exchanges the funds, they will both gain.
In a currency swap, interest payments are made without netting. Full interest payments are exchanged at each settlement date. Currency swap counterparties actually exchange notional principal because the motivation of the parties is to receive foreign currency.
作者: hinsafdar    时间: 2012-4-1 11:07

Consider a U.S. investor who has a portfolio of Australian government bonds that are denominated in Australian dollars. Why would the investor wish to enter into a swap contract? As the Australian:
A)
dollar increases in value, the interest payments from the Australian bonds translate into fewer U.S. dollars.
B)
interest rate decreases, the value of the Australian bonds decreases.
C)
dollar decreases in value, the interest payments from the Australian bonds translate into fewer U.S. dollars.


As the Australian dollar decreases in value, the interest payments from the bond (and perhaps the bond’s face value if the bond is at maturity), translate into fewer U.S. dollars, which reduces the interest earned on the Australian bonds.
作者: hinsafdar    时间: 2012-4-1 11:08

Parties agreeing to swap cash flows are:
A)
swap facilitators.
B)
counterparties.
C)
agents.


The parties agreeing to swap cash flows are called the counterparties.
作者: hinsafdar    时间: 2012-4-1 11:08

Jan Jurgen, CFA charterholder, recently accepted a position in the Treasury area of a conservatively managed commercial bank. Jurgen intends to suggest the use of plain-vanilla interest rate swaps at today’s Asset & Liability Management Committee meeting. Jurgen is least likely to argue that the use of interest rate swaps will:
A)
avoid costly regulations.
B)
reduce the exposure from the mismatch between floating rate assets and fixed rate liabilities.
C)
create arbitrage profits by exploiting market inefficiencies.


Exploiting market inefficiencies is no longer considered a motivation for entering into swap agreements. Historically, there were two basic motivations for swaps, to exploit market inefficiencies and to attempt to obtain cheaper financing. Both were based on the belief that financial markets were inefficient. Today, the swap markets have matured and there are few arbitrage opportunities. The swap markets are considered operationally efficient and flexible. Thus, the main reasons to enter into swap agreements today include: to reduce transaction costs, to avoid costly regulations, and to maintain privacy.
作者: hinsafdar    时间: 2012-4-1 11:10

Consider a commercial bank with a portfolio of U.S. Treasury bonds. Why would the bank wish to engage in a swap contract? As the:
A)
U.S. dollar decreases, the value of the bonds decreases.
B)
interest rate increases, the value of the bonds decreases.
C)
interest rate decrease, the value of the bonds decreases.


Interest rates and bond prices are inversely related. Therefore, as interest rates increase, the value of the T-bonds decreases. The bank may wish to engage in a swap contract wherein the bank pays fixed and receives variable. In this case, as interest rates rise, the bank receives higher variable payments for making the same fixed payment in the swap. The cash flows received in the swap offset the reduction in the bond portfolio’s value.
作者: hinsafdar    时间: 2012-4-1 11:10

The term notional principal refers to:
A)
the amount swapped.
B)
the period of time involved.
C)
the cash interest payment.


The notional principal is the amount swapped. Note that the notional principal does not actually change hands with plain vanilla interest rate swaps, but is used to calculate the interest payment streams to be exchanged. Notional principal does exchange hands in a foreign currency swap.
作者: prashantsahni    时间: 2012-4-1 11:12

Which of the following characteristics about swaps is least accurate? Swaps:
A)
are highly regulated.
B)
have no active secondary market.
C)
are custom instruments.


Swap contracts are largely unregulated.
作者: prashantsahni    时间: 2012-4-1 11:13

Which of the following choices is generally NOT part of a plain-vanilla swap transaction?
A)
Tenor.
B)
Exchange of notional amount.
C)
Swap facilitator.


Since the notional principal swapped is the same (and in the same currency) for both counterparties, there is no need to actually exchange cash. The counterparties are the pay-fixed and receive-fixed sides. A swap facilitator helps to bring the counterparties together and may be either an agent or a broker. The tenor of the swap is the time frame covered by the deal, or the time to maturity of the swap.
作者: prashantsahni    时间: 2012-4-1 11:13

The motivation for swap agreements would be:
A)
guaranteed performance on the contracts for all parties.
B)
the reduction of business risk.
C)
the reduction of transactions costs.


Historically, there were two basic motivations for swaps: to exploit perceived market inefficiencies and to attempt to obtain cheaper financing. Both of these motivations are based on the concept that the financial markets are inefficient. This fact, unfortunately, is no longer true. Today, the swap markets are mature and offer few arbitrage opportunities. Swap markets are now viewed as being more operationally efficient and a more flexible means of packaging and transforming cash flows than any other method. The reasons given now for using the swap markets are to: reduce transactions costs, avoid costly regulations, and maintain privacy.
作者: prashantsahni    时间: 2012-4-1 11:13

Which of the following is NOT a likely motivation today for entering into a swap agreement?
A)
Exploit perceived market inefficiencies.
B)
Maintain privacy.
C)
Avoid costly regulation.


During the 1980s, some parties entered the swap market in an effort to exploit perceived market inefficiencies. Today, the uses of the swaps market are not motivated by perceived informational inefficiencies.
作者: prashantsahni    时间: 2012-4-1 11:13

Which of the following is an advantage of the swaps market over the futures markets? The:
A)
credit risk of the contract.
B)
ability to hedge over long time horizons.
C)
liquidity of the contract.


The futures market uses a standardized contract, which increases the liquidity of the contract. Also, futures exchanges assume the credit risk. However, as the time horizon increases, the liquidity of futures contracts decreases substantially. Therefore, swaps are considered a better method of hedging over long time horizons.
作者: prashantsahni    时间: 2012-4-1 11:18

Which of the following is a reason to use the swaps market rather than the futures market? To:
A)
reduce the credit risk involved with the contract.
B)
increase the liquidity of the contract.
C)
maintain the firm's privacy.


The futures market, because of the use of a standardized contract, is more liquid; and, because the exchange guarantees the contract, futures contracts have less credit risk. However, swaps contracts, because they are over-the-counter (private) contracts, allow the firm to maintain privacy.
作者: prashantsahni    时间: 2012-4-1 11:21

Consider a U.S. commercial bank that borrows funds in England for one year denominated in English pounds. Why would the investor wish to enter into a swap contract? As the:
A)
English pound decreases in value, it takes more U.S. dollars to pay off the English liability.
B)
English pound increases in value, it takes more U.S. dollars to pay off the English liability.
C)
U.S. interest rate increases, the value of the English liability increases.


As the English pound increases in value, it takes more U.S. dollars to pay off the English liability, which increases the interest cost of borrowing funds denominated in English pounds.
作者: prashantsahni    时间: 2012-4-1 11:21

Which of the following statements about swaps is least accurate?
A)
Swaps are illiquid.
B)
Parties to swap contracts are often individual speculators.
C)
Swaps typically have zero value at initiation.


Parties to swaps contracts are usually large institutions, rarely individual speculators or hedgers.
作者: prashantsahni    时间: 2012-4-1 11:22

Swap contracts typically:
A)
cover a single payment.
B)
are standardized contracts.
C)
do not require a payment from either party at initiation.


Swaps typically do not require a payment from either party at initiation. The exception is currency swaps.
作者: prashantsahni    时间: 2012-4-1 11:23

Determine the transactions involved with a plain vanilla interest rate swap and whether or not notional principal is generally swapped:
Plain vanilla interest rate swap Notional principal
A)
pay fixed rate, pay fixed rate swapped
B)
pay floating rate, pay fixed rate not swapped
C)
pay fixed rate, pay floating rate swapped


The most common type of interest rate swap is called a plain vanilla interest rate swap. It involves trading fixed interest rate payments for floating-rate payments. Notional principal is generally not swapped in single currency swaps.
作者: prashantsahni    时间: 2012-4-1 11:23

Which of the following statements regarding plain-vanilla interest rate swaps is least accurate?
A)
The settlement dates are when the interest payments are to be made.
B)
The time frame covered by the swap is called the tenor of the swap.
C)
In a swap contract, the counterparties usually swap the notional principal.


The notional principal is generally not swapped, as it is usually the same for both parties in the swap deal.
作者: prashantsahni    时间: 2012-4-1 11:24

All of the following are ways to exit a swap contract EXCEPT:
A)
selling a swaption.
B)
entering an offsetting swap with the original counterparty.
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.
作者: kim226    时间: 2012-4-1 11:55

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.
作者: kim226    时间: 2012-4-1 11:55

The least likely way to terminate a swap agreement prior to expiration is to:
A)
sell the swap.
B)
make/receive a payment to/from the original counterparty.
C)
exercise a swaption.


There is no functioning secondary market in swaps; selling a swap would be unusual and would require the permission of the counterparty.
作者: kim226    时间: 2012-4-1 11:56

Consider a U.S. commercial bank that takes in one-year certificates of deposit (CDs) in its Hong Kong branch, denominated in Hong Kong dollars, to fund three-year, fixed-rate loans the bank is making in the U.S. denominated in U.S. dollars. Why would this bank wish to enter into a currency swap? The bank faces the risk that the Hong Kong dollar:
A)
decreases in value against the U.S. dollar and the risk that interest rates increase in Hong Kong.
B)
decreases in value against the U.S. dollar and the risk that interest rates decrease in Hong Kong.
C)
increases in value against the U.S. dollar and the risk that interest rates increase in Hong Kong.


The bank faces two problems. First, if the Hong Kong dollar increases in value, it will take more U.S. dollars to repay the Hong Kong depositors. Indeed, if the Hong Kong dollar increases significantly, it may take more U.S. dollars to repay the Hong Kong depositors than the bank makes on the U.S. loan. Secondly, if the interest rate in Hong Kong rises, the bank pays more in interest on its CDs while the rate on the bank’s U.S. loans does not change. In this case, interest expense would rise and interest income would remain the same, which narrows the bank’s profits.
作者: kim226    时间: 2012-4-1 11:57

Consider a U.S. commercial bank that wishes to make a two-year, fixed-rate loan in Australia denominated in Australian dollars. The U.S. bank will fund the loan by issuing two-year CDs in the U.S. Why would the U.S. bank wish to enter into a currency swap? The bank faces the risk that:
A)
the Australian dollar decreases in value against the U.S. dollar.
B)
the Australian dollar increases in value against the U.S. dollar.
C)
interest rates in Australia decline.


There is no interest rate risk for the bank because the bank has fixed rates for two years on both the asset and the liability. However, the bank faces a problem in that if the Australian dollar decreases in value, the loan (and the interest payments from the loan) will not translate back into as many U.S. dollars. Indeed, if the Australian dollar decreases significantly, the loan (and the interest payments from the loan) may not translate back into enough U.S. dollars to repay the CDs.
作者: kim226    时间: 2012-4-1 11:57

An investor enters into a swap that requires the notional principal amounts be exchanged at the beginning and at the end of the swap contract. This is most likely a:
A)
plain-vanilla swap.
B)
fixed-for-fixed swap.
C)
currency swap.


A currency swap requires that the notional amount of one currency be exchanged for the notional amount of the other currency at both the beginning and the end of the swap.
作者: kim226    时间: 2012-4-1 11:58

Which of the following statements regarding a fixed-for-fixed currency swap of euros for British pounds is least accurate?
A)
The notional principal amounts, adjusted for exchange rate changes, are exchanged at the termination of the swap.
B)
One party makes certain payments in Euros.
C)
The periodic payments are not netted, both payments are always made.


The original notional principal amounts are exchanged at contract termination; there is no adjustment to the amounts for the change in exchange rates over the life of the swap.
作者: kim226    时间: 2012-4-1 11:58

Which of the following statements about a currency swap is CORRECT?
A)
Changes in exchange rates do not affect the swap payments.
B)
Payments are netted at each settlement date.
C)
If one party pays a fixed rate of interest, the other party must pay a floating rate.


Swap payments are based on the notional amounts of each currency and either a fixed or floating rate for either or both parties. While changes in exchange rates might be reflected in interest rates, they have no direct effect on any of the payment amounts over the term of the swap.
作者: kim226    时间: 2012-4-1 11:59

Travis Dillard, CFA, is the equity return receiver in a monthly-pay equity swap. If the equity index declines by 2% in a month, Dillard must pay the swap counterparty an amount of cash that is:
A)
greater than 2% of the notional amount of the swap.
B)
equal to 2% of the notional amount of the swap.
C)
less than 2% of the notional amount of the swap.


If the equity return is negative, the equity return receiver (fixed rate payer) in an equity swap owes the equity return payer (fixed rate receiver) the percentage decline in the equity index times the notional amount, plus the fixed rate payment for the period.
作者: kim226    时间: 2012-4-1 11:59

An equity swap can specify that one party pay any of the following EXCEPT:
A)
the return on a specific portfolio of three stocks including dividends.
B)
the return on a single stock.
C)
the total return on a corporate bond.


A swap involving the return on a bond would not be an equity swap.
作者: kim226    时间: 2012-4-1 12:00

When one party pays a fixed rate of interest in an equity swap, which of the following is least accurate?
A)
The fixed-rate receiver will never get more than the fixed rate.
B)
The equity-return payer will gain if the equity return is zero.
C)
Unlike other swaps, in an equity swap the one-quarter-ahead payment is not known at the end of the previous quarter.


If the periodic return on the equity is negative, the fixed-rate payer must pay the fixed rate plus the percentage of (negative) equity return, times the notional principal.
作者: kim226    时间: 2012-4-1 12:00

A contract in which one party pays a fixed rate of interest on a notional amount in return for the return on a single stock, paid quarterly for four quarters, is a(n):
A)
returns swap.
B)
equity swap.
C)
plain vanilla swap.


A swap contract in which at least one party makes payments based on the return on an equity, portfolio, or market index, is called an equity swap.
作者: kim226    时间: 2012-4-1 12:00

XYZ, Inc. has entered into a "plain-vanilla" interest rate swap on $5,000,000 notional principal. XYZ company pays a fixed rate of 8.5% on payments that occur at 180-day intervals. Platteville Investments, a swap broker, negotiates with another firm, SSP, to take the receive-fixed side of the swap. The floating rate payment is based on LIBOR (currently at 7.2%). At the time of the next payment (due in exactly 180 days), XYZ company will:
A)
pay the dealer net payments of $65,000.
B)
receive net payments of $32,500.
C)
pay the dealer net payments of $32,500.


The net payment formula for the fixed-rate payer is:

Fixed Rate Paymentt = (Swap Fixed Rate − LIBORt-1) × (# days in term / 360) × Notional Principal

If the result is positive, the fixed-rate payer owes a net payment and if the result is negative, then the fixed-rate payer receives a net inflow. Note:We are assuming a 360 day year.

Fixed Rate Payment = (0.085 − 0.072) × (180 / 360) × 5,000,000 = $32,500.

Since the result is positive, XYZ owes this amount to the dealer, who will remit to SSP.
作者: kim226    时间: 2012-4-1 12:01

Consider a $10,000,000 1-year quarterly-pay swap with a fixed rate of 4.5% and a floating rate of 90-day London Interbank Offered Rate (LIBOR) plus 150 basis points. 90-day LIBOR is currently 3% and the current forward rates for the next four quarters are 3.2%, 3.6%, 3.8%, and 4%. If these rates are actually realized, at the second quarterly settlement date, the fixed-rate payer in the swap will:
A)
receive a payment of $10,000.
B)
neither make nor receive a payment.
C)
receive a payment of $5,000.


The payment at the second settlement date will be based on 90-day LIBOR realized at the first settlement date, 3.2%. The payment (net) by the floating-rate payer will be:
(0.032 + 0.015 − 0.045) × 90/360 × 10,000,000 = $5,000
作者: kim226    时间: 2012-4-1 12:01

DWR Services, Ltd., arranges a plain vanilla interest rate swap between RWDY Enterprises (pays fixed) and RED, Inc. (receives fixed). The swap has a notional value of $25,000,000 and 270 days between payments. LIBOR is currently at 7.0%. If at the time of the next payment (due in exactly 270 days), RWDY receives net payments of $93,750, the swap fixed rate is closest to:
A)
7.500%.
B)
6.625%.
C)
6.500%.

、
The net payment formula for the fixed-rate payer is:

Fixed Rate Paymentt = (Swap Fixed Rate − LIBORt-1) × (# days in term / 360) × Notional Principal

If the result is positive, the fixed-rate payer owes a net payment and if the result is negative, then the fixed-rate payer receives a net inflow. Note: We are assuming a 360 day year.
We can manipulate this equation to read:

Swap Fixed Rate = LIBORt-1 + [(Fixed Rate Payment / ( # days in term / 360 × Notional Principal)

Note: the Fixed Rate payment will have a negative sign because we are told that RWDY receives a net payment.

= 0.07 + [(-93,750 / (270 / 360 × 25,000,000) = 0.07 − 0.005 = 0.065, or 6.5%.

Note: We know that the Swap Fixed Rate will be less than the floating rate, or LIBOR, because RWDY receives a net payment.
作者: kim226    时间: 2012-4-1 12:02

DWR Services, Ltd., arranges a plain vanilla interest rate swap between RWDY Enterprises (pays fixed) and RED, Inc. (receives fixed). The swap has a notional value of $25,000,000 and 270 days between payments. LIBOR is currently at 7.0%. If at the time of the next payment (due in exactly 270 days), RWDY receives net payments of $93,750, the swap fixed rate is closest to:
A)
7.500%.
B)
6.625%.
C)
6.500%.


The net payment formula for the fixed-rate payer is:

Fixed Rate Paymentt = (Swap Fixed Rate − LIBORt-1) × (# days in term / 360) × Notional Principal

If the result is positive, the fixed-rate payer owes a net payment and if the result is negative, then the fixed-rate payer receives a net inflow. Note: We are assuming a 360 day year.
We can manipulate this equation to read:

Swap Fixed Rate = LIBORt-1 + [(Fixed Rate Payment / ( # days in term / 360 × Notional Principal)

Note: the Fixed Rate payment will have a negative sign because we are told that RWDY receives a net payment.

= 0.07 + [(-93,750 / (270 / 360 × 25,000,000) = 0.07 − 0.005 = 0.065, or 6.5%.

Note: We know that the Swap Fixed Rate will be less than the floating rate, or LIBOR, because RWDY receives a net payment.
作者: kim226    时间: 2012-4-1 12:02

Consider a $10,000,000 1-year quarterly-pay swap with a fixed rate of 4.5% and a floating rate of 90-day London Interbank Offered Rate (LIBOR) plus 150 basis points. 90-day LIBOR is currently 3% and the current forward rates for the next four quarters are 3.2%, 3.6%, 3.8%, and 4%. If these rates are actually realized, at the termination of the swap the floating-rate payer will:
A)
pay $25,000.
B)
pay $20,000.
C)
pay $10,020,000.


The payment at the fourth (final) settlement date will be based on the realized LIBOR at the third quarter, 3.8%. The net payment by the floating rate payer will be:
(0.038 + 0.015 − 0.045) × 90/360 × 10,000,000 = $20,000
作者: kim226    时间: 2012-4-1 12:02

123, Inc. has entered into a "plain-vanilla" interest rate swap on $10,000,000 notional principal. 123 company receives a fixed rate of 6.5% on payments that occur at monthly intervals. Platteville Investments, a swap broker, negotiates with another firm, PPS, to take the pay-fixed side of the swap. The floating rate payment is based on LIBOR (currently at 4.8%). At the time of the next payment (due in exactly one month),123, Inc. will:
A)
receive net payments of $42,500.
B)
receive net payments of $14,167.
C)
pay the dealer net payments of $14,167.


The net payment formula for the floating rate payer is:

Floating Rate Paymentt = (LIBORt-1 − Swap Fixed Rate) × (# days in term / 360) × Notional Principal

If the result is positive, the floating-rate payer owes a net payment and if the result is negative, then the floating-rate payer receives a net inflow. Note: We are assuming a 360 day year.

Floating Rate Payment = (0.048 − 0.065) × (30 / 360) × 10,000,000 = -$14,167.

Since the result is negative,123 Inc. will receive this amount.

作者: kim226    时间: 2012-4-1 12:03

XYZ company has entered into a "plain-vanilla" interest rate swap on $1,000,000 notional principal. XYZ company pays a fixed rate of 8% on payments that occur at 90-day intervals. Six payments remain with the next one due in exactly 90 days. On the other side of the swap, XYZ company receives payments based on the LIBOR rate. Describe the transaction that occurs between XYZ company and the dealer at the end of the first period if the appropriate LIBOR rate is 8.8%.
A)
Dealer receives $2,000.
B)
Dealer pays XYZ company $20,000.
C)
XYZ company receives $2,000.


XYZ company owes the dealer ($1,000,000)(0.08)(90/360) = $20,000. The dealer owes XYZ company ($1,000,000)(0.088)(90/360) = $22,000. Net: The dealer pays XYZ company $22,000 - $20,000 = $2,000
作者: kim226    时间: 2012-4-1 12:03

Which of the following statements about swaps is NOT correct?
A)
In an interest rate swap, only the net interest payments are made.
B)
In a currency swap, only net interest payments are made.
C)
In an interest rate swap, the pay-fixed party makes a sequence of fixed rate interest payments and receives a sequence of floating rate interest payments.


In a currency swap, the two parties exchange cash at the initiation, make periodic interest payments to each other during the life of the swap agreement, and exchange the principal at the termination of the swap.
作者: kim226    时间: 2012-4-1 12:03

Which term does NOT apply to interest rate swaps?
A)
Time to maturity.
B)
Notional principal amount.
C)
Trading exchange.


Interest rate swaps are currently not traded on exchanges.
作者: kim226    时间: 2012-4-1 12:04

Which of the following statements regarding a plain vanilla swap is NOT correct?
A)
The notional principal amounts are exchanged at contract initiation and at the termination of the swap.
B)
Only a net payment is made on each settlement date.
C)
If interest rates decrease, the swap has a negative value to the fixed rate payer.


There is no exchange of the principal amount at the initiation or termination of a plain vanilla swap.
作者: kim226    时间: 2012-4-1 12:04

Consider a currency swap in which Party A pays 180-day London Interbank Offered Rate on $1,000,000 and Party B pays the Japanese yen riskless rate on 130,000,000 yen. Which of the following statements regarding the terms required at the initiation of the swap is CORRECT?
A)
Party A must pay 130,000,000 yen and receive $1,000,000.
B)
An exchange of principal amounts is not required at the initiation of the swap.
C)
Party A must pay $1,000,000 and receive 130,000,000 yen.


Since Party A is paying in dollars, Party A must receive dollars in exchange for yen at the beginning of the swap.
作者: kim226    时间: 2012-4-1 12:05

Consider a quarterly-pay currency swap where Party A pays London Interbank Offered Rate (LIBOR) on $1,000,000 and Party B pays 4% on 900,000 euros. Current LIBOR is 3% and at the end of 90 days it is 4%. Which of the following statements regarding the first settlement date is most accurate?
A)
Party A must make a payment of $7,500.
B)
Party A must make a payment of $10,000.
C)
The payments made depend on the exchange rate.


Floating rate payments in a swap are based on the reference rate for the prior period. The payment is:
0.03 × 90/360 × 1,000,000 = $7,500
作者: kim226    时间: 2012-4-1 12:05

A swap in which one party pays a fixed rate, one party pays a floating rate, and only a net payment is made on the settlement dates is referred to as a:
A)
plain vanilla swap.
B)
straight swap.
C)
net swap.


A swap in which one party pays a fixed rate, one party pays a floating rate, and only a net payment is made on the settlement dates is referred to as a plain vanilla swap.
作者: kim226    时间: 2012-4-1 12:06

HobbyHorse Syndicate has entered into a "plain-vanilla" interest rate swap on $100,000,000 notional principal. HobbyHorse receives a fixed rate of 7.5% on payments that occur every six months. The floating rate payment is based on LIBOR (currently at 6.75%). Because of the volatile interest rate environment, HobbyHorse has created a reserve to cover any cash outlay required at settlement dates. At the time of the next payment (due in exactly six months), the reserve balance is $250,000. To fulfill its obligations under the swap at the next payment date, HobbyHorse will need approximately how much additional cash?
A)
$0.
B)
$375,000.
C)
$125,000.

The net payment formula for the floating rate payer is:   

Floating Rate Paymentt = (LIBORt-1 - Swap Fixed Rate) × (# days in term / 360) × Notional Principal

If the result is positive, the floating-rate payer owes a net payment and if the result is negative, then the floating-rate payer receives a net inflow. Note: We are assuming a 360 day year.

Here, floating rate payment = (0.0675 - 0.075) × (180 / 360) × 100,000,000 = -$375,000. Since the result is negative, HobbyHorse will receive this amount. Thus, HobbyHorse needs $0 additional cash.


作者: kim226    时间: 2012-4-1 12:06

Why are payments NOT usually netted out in a currency swap?
A)
There are no payments in a currency swap except at initiation and maturity.
B)
There is no credit risk in a currency swap.
C)
The payments are denominated in two different currencies.


Payments are not usually netted out because the payments are denominated in two different currencies, which does not easily allow for netting.
作者: kim226    时间: 2012-4-1 12:07

The term exchange of borrowings refers to:
A)
currency swaps.
B)
swaptions.
C)
interest rate swaps.


In effect, in a currency swap, the two parties make independent borrowings and then exchange the proceeds. This is known as an exchange of borrowings. A swaption is an option on a swap that can be either American or European in form. (Swaptions are a Level II Topic).
作者: kim226    时间: 2012-4-1 12:07

In a plain vanilla interest rate swap:
A)
payments equal to the notional principal amount are exchanged at the initiation of the swap.
B)
each party pays a fixed rate of interest on a notional amount.
C)
one party pays a floating rate and the other pays a fixed rate, both based on the notional amount.


A plain vanilla swap is a fixed-for-floating swap.
作者: kim226    时间: 2012-4-1 12:54

No Errors Printing has entered into a "plain-vanilla" interest rate swap on $1,000,000 notional principal. No Errors receives a fixed rate of 5.5% on payments that occur at quarterly intervals. Platteville Investments, a swap broker, negotiates with another firm, Perfect Bid, to take the pay-fixed side of the swap. The floating rate payment is based on LIBOR (currently at 6.0%). Because of the current interest rate environment, No Errors expects to pay a net amount at the next settlement date and has created a reserve to cover the cash outlay. At the time of the next payment (due in exactly one quarter), the reserve balance is $1,000. To fulfill its obligations under the swap, No Errors will need approximately how much additional cash?
A)
No Errors will receive $250.
B)
$250.
C)
$0.


The net payment formula for the floating rate payer is:

Floating Rate Paymentt = (LIBORt-1 − Swap Fixed Rate) × (# days in term / 360) × Notional Principal

If the result is positive, the floating-rate payer owes a net payment and if the result is negative, then the floating-rate payer receives a net inflow. Note: We are assuming a 360 day year.
Here, Floating Rate Payment = (0.06 − 0.055) × (90 / 360) × 1,000,000 = $1,250. Since the result is positive, No Errors will pay this amount. Since the reserve balance is $1,000, No Errors needs an additional $250.
作者: kim226    时间: 2012-4-1 12:54

Consider a $10,000,000 1-year quarterly-pay swap with a fixed rate of 4.5 percent and a floating rate of 90-day London Interbank Offered Rate (LIBOR) plus 150 basis points. 90-day LIBOR is currently 3 percent and the current forward rates for the next four quarters are 3.2 percent, 3.6 percent, 3.8 percent, and 4 percent. If these rates are actually realized, at the first quarterly settlement date:
A)
the fixed-rate payer will be required to make a payment of $7,500.
B)
the floating rate payer will be required to make a payment of $92,500.
C)
no payments will be made.


The first floating rate payment is based on current LIBOR + 1.5% = 4.5%. This is equal to the fixed rate so no (net) payment will be made on the first settlement date.
作者: kim226    时间: 2012-4-1 12:55

Currency swap markets consist of transactions in:
A)
the forward market only.
B)
spot markets only.
C)
both spot and forward contracts.


In this explanation, Euro is used to represent foreign currency. In a currency swap, one counterparty (D) holds dollars and wants Euros. The other counterparty (E) holds Euros and wants dollars. They decide to swap their currency positions at the current spot exchange rate.  The counterparties exchange the full notional principal at the onset of the swap.  Then, on each settlement date, one party pays a fixed rate of interest on the foreign currency received, and the other party pays a floating rate on the dollars received.  Interest payments are not netted. Generally, the variable interest rate on the dollar borrowings is determined at the beginning of the settlement period and paid at the end of the settlement period.  At the conclusion of the swap, the notional currencies are again exchanged. Thus, currency swaps involved transactions in both the spot and forward (future) markets. A fixed-for-fixed currency swap is equivalent to a portfolio of foreign exchange forward contracts (both parties need to deliver currency in the future).



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