Swaption achieve, company, convert

NakedPuts

This is just a way to review this topic...all from the book. It covers all three usages of swaption.

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1. A company plans to take out a $10 million floating-rate 5-year loan in two years. The would like to use a swaption to give it the flexibility to convert the loan into fix-rate loan. Identify the type of swaption that would achieve this goal:

A) buy a payer swaption
B) buy a receiver swaption
C) sell a receiver swaption


2. A company is engaged in a two-year swap with quarterly payments. It is receiving 6 percent fixed and paying LIBOR. It would like the flexibility to terminate the swap at any time prior to the end of the two-year period. Identify the type of swaption that would achieve this objective.

A) buy a payer swaption
B) buy a receiver swaption
C) sell a receiver swaption

3. A company issues a five-year callable bond with a face value of €40 million. The bond pays a coupon annually of 10 percent, of which 3 percent is estimated to be a credit premium. The company would like to make the bond noncallable in exactly two years. Identify the type of swaption that would achieve this objective.

A) buy a payer swaption
B) buy a receiver swaption
C) sell a receiver swaption

bpdulog

1. A
2. A
3. C

NO EXCUSES

cityboy

1. A
2. A
3. C



Edited 1 time(s). Last edit at Sunday, May 15, 2011 at 11:19PM by janakisri.

infinitybenzo

1. A
2. A
3. C

@ Darkstar and @Wake2000

Don't sweat this. Just cram this: buy a receiver swaption = buy a call option and sell a receiver swaption = sell a call option. Don't bother yourself about how it works.

When a company issues a callable bond, it has bought a call option. To remove the call option, it has to sell the call option that was purchased. To sell the call option, simply sell a receiver swaption.

Darien

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