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LOS f: Explain and interpret the characteristics and uses of swaptions, including the difference between payer and receiver swaptions.
Q1. 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 floating-rate payer.
C) the right to enter a swap in the future as the fixed-rate payer.
Q2. The writer of a receiver swaption has:
A) the right to enter a swap in the future as the floating-rate payer.
B) an obligation to enter a swap in the future as the floating-rate payer.
C) an obligation to enter a swap in the future as the fixed-rate payer.
Q3. 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.
Q4. An investor who anticipates the need to exit a pay-fixed interest rate swap prior to expiration might:
A) buy a payer swaption.
B) buy a receiver swaption.
C) sell a payer swaption.
Q5. Which of the following statements regarding swaptions is FALSE? A swaption is often used to:
A) hedge the rate on an anticipated swap transaction.
B) create a synthetic bond position.
C) provide the right to terminate a swap.
Q6. Which of the following is least likely to be a use of a swaption?
A) Hedging the risk of a current fixed-rate commitment.
B) Exiting an offsetting swap at the exercise date.
C) Hedging the risk of an anticipated floating-rate obligation.
LOS f: Explain and interpret the characteristics and uses of swaptions, including the difference between payer and receiver swaptions. fficeffice" />
Q1. 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 floating-rate payer.
C) the right to enter a swap in the future as the fixed-rate payer.
Correct answer is C)
A payer swaption give its holder the right to enter a swap in the future as the fixed-rate payer.
Q2. The writer of a receiver swaption has:
A) the right to enter a swap in the future as the floating-rate payer.
B) an obligation to enter a swap in the future as the floating-rate payer.
C) an obligation to enter a swap in the future as the fixed-rate payer.
Correct answer is C)
A receiver swaption gives its owner the right to receive fixed, the writer has an obligation to pay fixed.
Q3. 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.
Correct answer is B)
A payer swaption will give Roberts the right to pay a fixed rate below market if rates rise.
Q4. An investor who anticipates the need to exit a pay-fixed interest rate swap prior to expiration might:
A) buy a payer swaption.
B) buy a receiver swaption.
C) sell a payer swaption.
Correct answer is B)
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.
Q5. Which of the following statements regarding swaptions is FALSE? A swaption is often used to:
A) hedge the rate on an anticipated swap transaction.
B) create a synthetic bond position.
C) provide the right to terminate a swap.
Correct answer is B)
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.
Q6. Which of the following is least likely to be a use of a swaption?
A) Hedging the risk of a current fixed-rate commitment.
B) Exiting an offsetting swap at the exercise date.
C) Hedging the risk of an anticipated floating-rate obligation.
Correct answer is A)
Swaptions will not be a good hedge for a current obligation since the swaption is for a swap in the future.
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