Reading 71: Swap Markets and Contracts- LOSb(part 2)～ Q1

interpret, currency, principal, received, payments

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

Q1. A U.S. bank enters into a plain vanilla currency swap with a German bank. The swap has a notional principal of US$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

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.

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.

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.

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.

Q6. The term exchange of borrowings refers to:

A) swaptions.

B) interest rate swaps.

C) currency swaps.

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.