AIM 1: Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows.

1、In a standard interest rate swap, the floating rate payments to be made at the end of each period are determined:

A) at the end of the period.
 
B) by the parties at inception of the swap.
 
C) at the beginning of the period.
 
D) by the parties at the conclusion of the swap.

2、The notional principal of a default swap is $30,000,000, and the reference price is 100%. The final price is estimated at 25%, and the annual coupon rate was 9%. It has been 60 days since the last coupon payment. What is the cash amount to settle the swap?

A) $22,500,000.
 
B) $22,050,000.
 
C) $19,800,00.
 
D) $7,950,000.

The  correct answer is B

The cash settlement of the default swap is the notional principle times the reference amount minus the final price and accrued

interest:

settlement amount = $30,000,000 × [100% ? (25% + 9% × (60 / 360))] = $22,050,000.

AIM 3: Evaluate the advantages and disadvantages of the comparative advantage argument used for the existence of the interest rate swap market.

1、A primary criticism with the comparative advantage argument as justification for the existence of swaps is related to which of the following?

A) Credit risk.
 
B) Perceived advantage in one market over the other.
 
C) Constant spreads over London Interbank Offered Rate (LIBOR).
 
D) Inefficient credit markets.

The  correct answer is A
Credit risk is the main criticism of the comparative advantage argument, which fails to take into account the fact that a swap participant faces credit risk.

[此贴子已经被作者于2009-6-24 17:01:10编辑过]

2、The success of the currency swap markets has been explained by which of the following?

A) Reduced counterparty risk arguments.
 
B) Efficient exchange rate pricing arguments.
 
C) Comparative advantage arguments.
 
D) Floating interest rate risk arguments. 

AIM 5: Value a plain vanilla interest rate swap based on two simultaneous bond positions.

1、A firm has entered into a $22.5 MM plain vanilla interest rate swap in which it pays fixed at 4.2 percent and receives LIBOR. At inception, what is the firm’s credit exposure on this swap if LIBOR is 3.2 percent?

A) $0.
 
B) $225,000.
 
C) $11.25 MM.
 
D) $22.5 MM.

The  correct answer is A
The value of a plain vanilla swap at inception is zero as the swap fixed rate (SFR) is set to make the PV of both the fixed and expected floating rate payments equal.

2、A forward rate agreement (FRA):

A) is risk-free when based on the Treasury bill rate.
 
B) can be used to hedge the interest rate exposure of a floating-rate loan.
 
C) is priced in dollars.
 
D) is settled by making a loan at the contract rate.

The  correct answer is B
An FRA settles in cash and carries both default risk and interest rate risk, even when based on an essentially risk-free rate. It can be used to hedge the risk/uncertainty about a future payment on a floating rate loan.

3、A financial institution has entered into a plain vanilla currency swap with one of its customers. The period left on the swap is 3 years, with the institution paying 5 percent on USD20 million and receiving 2.5 percent on JPY1,500 million annually. The current exchange rate is JPY120/USD, and the flat term structure in both countries generates a 3 percent rate in the U.S. and a 0.75 percent rate in Japan. The current value of this swap to the institution is closest to:

A) USD7.95 million.
 
B) USD6.875 million. 
 
C) –USD7.95 million.
 
D) –USD6.875 million.

The  correct answer is C

The institution is paying USD and receiving JPY, so the value of this swap will equal the current exchange rate times the value of the JPY portion minus the value of the USD portion. The JPY portion of this swap is:

4、Two banks enter into a 1-year plain vanilla interest-rate swap with the following terms:

Notional principal is $500,000,000.

The fixed component of the swap is 7%, which is the current market rate.

The floating component of the swap is LIBOR + 200bps.

If the current risk-free rate is 4 percent, the value for this swap at inception is closest to:

A) $500,000,000.
 
B) $0.
 
C) $8,750,000.
 
D) $35,000,000.

The  correct answer is B

The initial value of a swap is always zero. As interest rates move and payments take place, the value of the swap will change for both parties.

5、A bank entered into a 4-year tenor plain vanilla swap three years ago. The agreements of the swap are to pay 6.5 percent annually, based on annual compounding with a 30/360 day-count convention, fixed rate on a $50 million notional, and receive 1-year London Interbank Offered Rate (LIBOR). The continuously compounded LIBOR for 1-year obligations is currently 5.75 percent. The 1-year LIBOR at the beginning of the period was 6.25 percent. The value of the swap is closest to:

A) $110,000.
 
B) –$110,000.
 
C) $800,522.
 
D) –$257,020.

The  correct answer is B

The value of the fixed-rate component of the swap is ($50 × 1.065)e(–0.0575) = $50.27M. The value of the floating-rate component of the swap is ($50 × 1.0625)e(–0.0575) = $50.16M. Hence, the value of the swap to this counterparty is $50.16M – $50.27M = –$110,000.

AIM 11: Discuss the role of credit risk inherent in an existing swap position.

1、The credit risks to the fixed-rate payer in a swap:

A) increase when floating rates are below the swap rate. 
 
B) are greatest at the inception of the swap.
 
C) are greatest just prior to maturity.
 
D) increase when floating rates rise above the swap rate.