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Reading 72: Swap Markets and Contracts-LOS a 习题精选

Session 17: Derivatives
Reading 72: Swap Markets and Contracts

LOS a: Describe the characteristics of swap contracts and explain how swaps are terminated

 

 

Which of the following statements regarding plain-vanilla interest rate swaps is least accurate?

A)
In a swap contract, the counterparties usually swap the notional principal.
B)
The settlement dates are when the interest payments are to be made.
C)
The time frame covered by the swap is called the tenor of the swap.


 

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

thanks a lot.

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thanks a lot

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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.


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.


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)
Most currency swaps are done to exploit market inefficiencies.
B)
The periodic interest payments are exchanged in full each period.
C)
Notional principal is exchanged at the termination of the swap.


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.

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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 not exchanged by the counterparties.
B)
is used to calculate the fixed rate interest payment; the swap's market value is used to calculate the floating rate payment.
C)
does not vary during the swap tenor.


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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Consider a commercial bank with a portfolio of U.S. Treasury bonds. Why would the bank wish to engage in a swap contract? As the:

A)
U.S. dollar decreases, the value of the bonds decreases.
B)
interest rate increases, the value of the bonds decreases.
C)
interest rate decrease, the value of the bonds decreases.


Interest rates and bond prices are inversely related. Therefore, as interest rates increase, the value of the T-bonds decreases. The bank may wish to engage in a swap contract wherein the bank pays fixed and receives variable. In this case, as interest rates rise, the bank receives higher variable payments for making the same fixed payment in the swap. The cash flows received in the swap offset the reduction in the bond portfolio’s value.

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Jan Jurgen, CFA charterholder, recently accepted a position in the Treasury area of a conservatively managed commercial bank. Jurgen intends to suggest the use of plain-vanilla interest rate swaps at today’s Asset & Liability Management Committee meeting. Jurgen is least likely to argue that the use of interest rate swaps will:

A)
avoid costly regulations.
B)
reduce the exposure from the mismatch between floating rate assets and fixed rate liabilities.
C)
create arbitrage profits by exploiting market inefficiencies.


Exploiting market inefficiencies is no longer considered a motivation for entering into swap agreements. Historically, there were two basic motivations for swaps, to exploit market inefficiencies and to attempt to obtain cheaper financing. Both were based on the belief that financial markets were inefficient. Today, the swap markets have matured and there are few arbitrage opportunities. The swap markets are considered operationally efficient and flexible. Thus, the main reasons to enter into swap agreements today include: to reduce transaction costs, to avoid costly regulations, and to maintain privacy.

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Parties agreeing to swap cash flows are:

A)
swap facilitators.
B)
agents.
C)
counterparties.


The parties agreeing to swap cash flows are called the counterparties.

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