1.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)   Speculating on the direction of interest rate changes.

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

2.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 LIBOR yield curve, Roberts should:

A)   buy a receiver swaption.

B)   write a payer swaption.

C)   buy a payer swaption.

D)   write a receiver swaption.

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

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

4.A payer swaption gives its holder:

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

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

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

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

5.Which of the following statements regarding swaptions is FALSE? A swaption is often used to:

A)   provide the right to terminate a swap.

B)   hedge the rate on an anticipated swap transaction.

C)   speculate on interest rate changes.

D)   create a synthetic bond position.

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

A)   buy a receiver swaption.

B)   buy a payer swaption.

C)   sell a payer swaption.

D)   sell a receiver swaption.

1.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)   Speculating on the direction of interest rate changes.

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

The correct answer was B)

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

2.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 LIBOR yield curve, Roberts should:

A)   buy a receiver swaption.

B)   write a payer swaption.

C)   buy a payer swaption.

D)   write a receiver swaption.

The correct answer was C)

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

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

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

The correct answer was A)

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

4.A payer swaption gives its holder:

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

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

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

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

The correct answer was B)

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

5.Which of the following statements regarding swaptions is FALSE? A swaption is often used to:

A)   provide the right to terminate a swap.

B)   hedge the rate on an anticipated swap transaction.

C)   speculate on interest rate changes.

D)   create a synthetic bond position.

The correct answer was D)

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.

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

A)   buy a receiver swaption.

B)   buy a payer swaption.

C)   sell a payer swaption.

D)   sell a receiver swaption.

The correct answer was A)

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.