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LOS b, (Part 2): Calculate and interpret the payments on a currency swap. fficeffice" />

Q1. A U.S. bank enters into a plain vanilla currency swap with a German bank. The swap has a notional principal of US$ffice:smarttags" />15m (Euro 15.170m). At each settlement date, the U.S. bank pays a fixed rate of 6.5 percent on the Euros received, and a German bank pays a variable rate equal to LIBOR+2 percent on the U.S. dollars received. Given the following information, what payment is made to whom at the end of year 2?

                 U.S. bank pays      German bank pays

 

A)       Euro 986,050               US$1,275,000

B)       Euro 986,050               US$975,000

C)       US$975,000                 Euro 986,050

Correct answer is A)

The U.S. bank pays 6.5% fixed on Euro 15,170,000, which makes for an annual payment of Euro 986,050. The variable rate to be used at time period 2 is set at time period 1 (the arrears method). Therefore, the German bank pays 6.5% + 2% = 8.5% times US$15,000,000 for a payment of US$1,275,000.

 

Q2. 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 130,000,000 yen and receive $1,000,000.

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

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

Correct answer is A)

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

 

Q3. Consider a quarterly-pay currency swap where Party A pays London Interbank Offered Rate (LIBOR) on $1,000,000 and Party B pays 4% on 900,000 euros. Current LIBOR is 3% and at the end of 90 days it is 4%. Which of the following statements regarding the first settlement date is most accurate?

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

B)   The payments made depend on the exchange rate.

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

Correct answer is 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

 

Q4. Why are payments NOT usually netted out in a currency swap?

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

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

C)   The payments are denominated in two different currencies.

Correct answer is C)

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

 

Q5. 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% 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$11.25 million.

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

Correct answer is B)       

The U.S. bank pays 4.5% 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% times US$250 million for a payment of US$11.25 million.

 

Q6. The term exchange of borrowings refers to:

A)   swaptions.

B)   interest rate swaps.

C)   currency swaps.

Correct answer is C)

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).

 

Q7. A U.S. bank enters into a plain vanilla currency swap with a notional principal of US$100m (￡67m). At each settlement date, the U.S. bank pays a fixed rate of 8% on the pounds received, and an English bank pays a variable rate equal to London Interbank Offered Rate (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)   ￡5.36m and the English bank pays US$6m.

B)   US$5.5m and the English bank pays ￡5.36m.

C)   ￡5.36m and the English bank pays US$5.5m.

Correct answer is C)

The U.S. bank pays 8% fixed on ￡67m, which makes for an annual payment of ￡5.36m. The variable rate to be used at time period 2 is set at time period 1 (the arrears method). Therefore, the English bank pays 5.5% times US$100m for a payment of US$5.5m.

 

[此贴子已经被作者于2009-3-2 11:23:58编辑过]