Reading 71: Swap Markets and Contracts LOSa习题精选 face, statements, following, regarding

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LOS a: Describe the characteristics of swap contracts.

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.

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The notional principal is generally not swapped, as it is usually the same for both parties in the swap deal.

 

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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.

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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.

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The least likely way to terminate a swap agreement prior to expiration is to:

A) make/receive a payment to/from the original counterparty.

B) exercise a swaption.

C) sell the swap.

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There is no functioning secondary market in swaps; selling a swap would be unusual and would require the permission of the counterparty.

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Which of the following statements about notional principal in plain vanilla interest rate swaps is least accurate? Notional principal:

A) is used to calculate the fixed rate interest payment; the swap's market value is used to calculate the floating rate payment.

B) is not exchanged by the counterparties.

C) does not vary during the swap tenor.

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The notional amount is used to calculate both the fixed and the floating rate payment streams. Both of the other choices are true.

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Which of the following is NOT considered a reason for using the swaps market? To:

A) reduce transactions costs.

B) maintain privacy.

C) exploit market inefficiencies.

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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.

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All of the following are ways to exit a swap contract EXCEPT:

A) entering an offsetting swap with the original counterparty.

B) selling a swaption.

C) making a cash payment to the original counterparty.

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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.

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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.

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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.

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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 involved in the swap agreement are called counterparties.

C) parties generally agree to swap the notional principal.

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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.

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Which transaction would least likely be classified as an interest rate swap?

A) Receive U.S. fixed, pay U.S. commercial paper.

B) Pay USD fixed, receive U.S. LIBOR.

C) Receive AUD fixed, pay NZD floating.

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Because it involves two different currencies, this would be a currency swap.

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Which of the following statements about a currency swap is least accurate?

A) The periodic interest payments are exchanged in full each period.

B) Notional principal is exchanged at the termination of the swap.

C) Most currency swaps are done to exploit market inefficiencies.

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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.