1．A U.S. bank enters into a plain vanilla currency swap with a notional principal of US$250 million (GBP150 million).  At each settlement date, the U.S. bank pays a fixed rate of 4.5 percent on the British pounds received and the British bank pays a variable rate equal to LIBOR on the U.S. dollars received.  Given the following information, what payment is made to whom at the end of year 2?

The U.S. bank pays:

A)   US$11.25 million and the British bank pays £6.75 million.

B)   £6.75 million and the British bank pays US$12.5 million.

C)   US$12.5 million and the British bank pays £6.75 million.

D)   £6.75 million and the British bank pays US$11.25 million

2．Why are payments NOT usually netted out in a currency swap?

A)   There is no credit risk in a currency swap.

B) The notional principal is not swapped at initiation.

C)   The payments are denominated in two different currencies.

D)   There are no payments in a currency swap except at initiation and maturity.

3．The term exchange of borrowings refers to:

A)   swaptions.

B)   currency swaps.

C)   interest rate swaps.

D)   hedging bank liabilities.

4．Consider a quarterly-pay currency swap where Party A pays London Interbank Offered Rate (LIBOR) on $1,000,000 and Party B pays 4 percent on 900,000 euros. Current LIBOR is 3 percent and at the end of 90 days it is 4 percent. Which of the following statements regarding the first settlement date is TRUE?

A)   Party A must make a payment of $10,000.

B)   The payments net to zero and no payment is made.

C)   Party A must make a payment of $7,500.

D)   The payments made depend on the exchange rate.

5．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 TRUE?

A)   Party A must pay $1,000,000 and receive 130,000,000 yen.

B)   Party A must pay 130,000,000 yen and receive $1,000,000.

C)   A single payment that depends on exchange rates must be made from one party.

D)   An exchange of principal amounts is not required at the initiation of the swap.

答案和详解如下：

1．A U.S. bank enters into a plain vanilla currency swap with a notional principal of US$250 million (GBP150 million).  At each settlement date, the U.S. bank pays a fixed rate of 4.5 percent on the British pounds received and the British bank pays a variable rate equal to LIBOR on the U.S. dollars received.  Given the following information, what payment is made to whom at the end of year 2?

0		1		2
LIBOR = 4%		LIBOR = 4.5%		LIBOR = 5%

The U.S. bank pays:

A)   US$11.25 million and the British bank pays £6.75 million.

B)   £6.75 million and the British bank pays US$12.5 million.

C)   US$12.5 million and the British bank pays £6.75 million.

D)   £6.75 million and the British bank pays US$11.25 million

The correct answer was D)

The U.S. bank pays 4.5 percent fixed on 150 million, which makes for an annual payment of 6.75 million. The variable rate to be used at time period 2 is set at time period 1 (the arrears method). Therefore, the British bank pays 4.5 percent times US$250 million for a payment of US$11.25 million.

2．Why are payments NOT usually netted out in a currency swap?

A)   There is no credit risk in a currency swap.

B) The notional principal is not swapped at initiation.

C)   The payments are denominated in two different currencies.

D)   There are no payments in a currency swap except at initiation and maturity.

The correct answer was C)

Payments are not usually netted out because the payments are denominated in two different currencies, which does not easily allow for netting.

3．The term exchange of borrowings refers to:

A)   swaptions.

B)   currency swaps.

C)   interest rate swaps.

D)   hedging bank liabilities.

The correct answer was B)

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).

4．Consider a quarterly-pay currency swap where Party A pays London Interbank Offered Rate (LIBOR) on $1,000,000 and Party B pays 4 percent on 900,000 euros. Current LIBOR is 3 percent and at the end of 90 days it is 4 percent. Which of the following statements regarding the first settlement date is TRUE?

A)   Party A must make a payment of $10,000.

B)   The payments net to zero and no payment is made.

C)   Party A must make a payment of $7,500.

D)   The payments made depend on the exchange rate.

The correct answer was C)

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

5．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 TRUE?

A)   Party A must pay $1,000,000 and receive 130,000,000 yen.

B)   Party A must pay 130,000,000 yen and receive $1,000,000.

C)   A single payment that depends on exchange rates must be made from one party.

D)   An exchange of principal amounts is not required at the initiation of the swap.

The correct answer was B)

Since Party A is paying in dollars, Party A must receive dollars in exchange for yen at the beginning of the swap.