Reading 63: Swap Markets and Contracts Los c~Q1-4

market, during, annual, interest, interpret

LOS c: Calculate and interpret the fixed rate on a plain vanilla interest rate swap and the market value of the swap during its life.

Q1. If the one year spot rate is 5%, the two-year spot rate is 5.5%, and the three year spot rate is 6%, the fixed rate on a 3-year annual pay swap is closest to:

A) 1.99%.

B) 4.50%.

C) 5.96%.

Q2. A U.S. firm (U.S.) and a foreign firm (F) engage in a plain-vanilla currency swap. The U.S. firm pays fixed in the FC and receives floating in dollars. The fixed rate at initiation and at the end of the swap was 5%. The variable rate at the end of year 1 was 4%, at the end of year 2 was 6%, and at the end of year 3 was 7%. At the beginning of the swap, $2 million was exchanged at an exchange rate of 2 foreign units per $1. At the end of the swap period the exchange rate was 1.75 foreign units per $1.

At the end of year 3, firm F will pay firm U.S.:

A) 280,000 foreign units.

B) $140,000.

C) $120,000.

Q3. A $10 million 1-year semi-annual-pay LIBOR-based interest-rate swap was initiated 90 days ago when LIBOR was 4.8%. The fixed rate on the swap is 5%, current 90-day LIBOR is 5% and 270-day LIBOR is 5.4%. The value of the swap to the fixed-rate payer is closest to:

A) $19,229.

B) $15,633.

C) $12,465.

The value of the swap to the fixed-rate payer is 10,113,580 – 10,097,947 = $15,633.

Q4. A U.S. firm (U.S.) and a foreign firm (F) engage in a plain-vanilla currency swap. The fixed rate at initiation and at the end of the swap was 5%. The variable rate at the end of year 1 was 4%, at the end of year 2 was 6%, and at the end of year 3 was 7%. At the beginning of the swap, $2 million was exchanged at an exchange rate of 2 foreign units per $1. At the end of the swap period the exchange rate was 1.75 foreign units per $1. At the end of year 1, firm:

A) U.S. pays firm F 200,000 foreign units.

B) F pays firm U.S. $200,000.

C) U.S. pays firm F $200,000.