|
LOS a: Evaluate hedging strategies that rely on swaps and illustrate their inherent risk exposures. ffice ffice" />
Q1. With respect to commodity swaps and interest rate swaps, if all interest rates undergo a simultaneous shift, which swap’s will change in market value?
A) Neither commodity swaps nor interest rate swaps.
B) Both commodity swaps and interest rate swaps.
C) Only one of the swaps will change in value.
Correct answer is B)
The market value of a swap equals the discounted cash flows from a swap that has been fully hedged with futures contracts. If all interest rates change, then the discount rate will change for both swaps, and this will change the market value of the swaps. Since a change in the interest rates will also change the cash flows of the hedged interest rate swap, the affect will probably be greater for the interest rate swap.
Q2. In the cases of commodity and interest rate swaps, which of the following statements is least accurate?
A) The notional principal of a commodity swap would not be denominated in a currency.
B) The swap price and swap rate of commodity swaps and interest rate swaps, respectively, are both weighted averages of values from futures and forward contracts.
C) Commodity swaps are only settled at the expiration of the swap and do not have reset periods during the tenor.
Correct answer is C)
The settlement of a commodity swap is based on the number of units of the commodity times the difference in the swap price and the market price. Both the swap rate and the swap price are weighted averages based upon futures prices (in the case of the commodity swap) and forward rates (in the case of the interest rate swap).
Q3. Which of the following types of risk that a position in a commodity swap is exposed to is least accurate?
A) market risk from changes in commodity prices.
B) J-factor risk.
C) interest-rate risk.
Correct answer is B)
A commodity swap’s value will change from both changes in interest rates and commodity prices. An investor faces credit risk any time the value of the commodity swap is greater than zero. J-factor risk refers to the risk investors in distressed debt face from judicial decisions. It is not generally associated with commodity swaps.
Q4. Morgan Hutchinson is a senior vice president of Global Swapsbank, Ltd., a multi-national banking corporation with prominent and international presence as a swaps dealer. Global Swapsbank deals in both interest rate swaps and commodity swaps and maintains offices on 5 continents and in more than 60 countries.
Among major financial market participants, concern has been growing about global economic conditions. Financial markets are declining. Economic growth is slowing. Odds of a recession are rising. In this environment, the economics division of Global Swapsbank has put the senior management of the firm on notice about potential changes in interest rates and commodity prices.
This economic concern has become sufficiently significant that the board of directors of Global Swapsbank has taken notice. They recognize that their projections for the firm’s upcoming fiscal year will not be met if the potential downturn in the global economy becomes a reality.
The board responded to this concern by charging ffice:smarttags" />Hutchinson with assessing the impact of the changing economic situation on the financial risk and obligations of Global Swapsbank with respect to its swap division. The board has also tasked him with determining whether changing global economic environment may affect demand for swaps and cause a shift in revenue growth projections for Global Swapsbank.
Hutchinson has asked for a meeting with Graciela Swanson, one of the firm’s senior global economists. They collaborate to analyze the impact of the economics division’s various possible scenarios on the performance of the swaps division.
Hutchinson briefs Swanson on the reasons for Global Swapsbank’s concerns. He explains to her:
Statement 1: We are very concerned about the impact of economic changes on current market conditions because the value of a commodity swap can change in response to market prices, forward prices or interest rates.
Statement 2: We have not been concerned about possible changes in the creditworthiness of the various counterparties in the event of deteriorating economic conditions because financially settled swaps eliminate credit risk.
Swanson asks Hutchinson what the major sources of swap revenue are to the firm. He explains that Global Swapsbank does a substantial amount of business in prepaid swaps. The firm has a wide-ranging client list among recurring buyers of prepaid swaps, and consequently the revenue of the firm depends significantly on the attractiveness of a prepaid swap to the buyer.
Hutchinson explains the buyer perspective on prepaid swaps to Swanson. He tells her, “The buyer of a prepaid swap faces both market risk from changes in forward prices and financial risk that changes in interest rates could lead to an increase in the settlement cost of the swap.”
Swanson pursues the discussion of prepaid swaps. However, she changes the focus to credit risk. Swanson points out to Hutchinson, “The swap division does need to consider credit risk in the event of deteriorating economic conditions because the buyer of a prepaid swap faces credit risk that the counterparty will not deliver the commodity.”
Hutchinson points out, “Credit risk can be removed from a commodity swap if the counterparties hedge with an appropriate interest rate swap. That might increase demand for swap transactions for Global Swapsbank.” Swanson suggests, “Hedging commodity transactions requires addressing the seasonality of commodity prices, which can be done by including either a varying quantity or a varying price component into the swap agreement.” Swanson and Hutchinson agree that Global Swapsbank should ensure that its swap agreements going forward include appropriate terms to hedge expected commodity risk.
Is Hutchinson correct in his statements about the risks to a buyer of a prepaid swap?
A) Both statements are correct.
B) Only one statement is correct.
C) Neither statement is correct.
Correct answer is B)
Hutchinson is correct with regard to Statement 1 that commodity swaps are responsive to changes in market or forward prices and to interest rates. Hutchinson is incorrect with regard to Statement 2 because, although there is less credit risk in financially settled swaps, the credit risk can go back and forth between the counterparties during the life of the swap as the value of the swap changes.
Q5. At inception and ignoring fees, the swap prices of a commodity swap and an interest rate swap have a market value of:
A) greater than zero for both.
B) greater than zero for only one of the swaps.
C) zero for both.
Correct answer is C)
The swap rate and swap price for both an interest rate swap and a commodity swap have a value of zero at inception.
Q6. Are Hutchinson and Swanson correct in their statements about the risks to a buyer of a prepaid swap?
A) Both are correct.
B) Only one is correct.
C) Neither are correct.
Correct answer is B)
Hutchinson is incorrect. The buyer of a prepaid swap does face both market risk and financial risk, but the source of the financial risk is the opportunity cost of the prepaid price, not a change in the settlement price. Swanson is correct that buyers do face credit risk in prepaid swaps that the counterparty will not deliver the commodity.
Q7. Regarding an annual reset commodity swap and an accreting interest rate swap, which one if any will the notional principal likely vary?
A) Neither will vary.
B) Both will vary.
C) Only one will vary.
Correct answer is C)
The notional principle may vary in a commodity swap that settles more than once per year, but that is unlikely in one that settles annually. The notional principle of an accreting interest rate swap increases over time.
Q8. Are Hutchinson and Swanson correct in their statements about the hedging and commodity swaps?
A) Only one is correct.
B) Both are correct.
C) Both are incorrect.
Correct answer is C)
Both Hutchinson and Swanson are incorrect. Hedging a commodity swap with an appropriate interest rate swap removes non-credit risk, not credit risk. Hedging commodity transactions requires addressing the seasonality of commodity prices, which can be done by including both a varying quantity and a varying price component into the swap agreement, not either/or.
Q9. Will the value of a commodity swap or interest rate swap change over time if market rates and prices do not change?
A) Only one will change.
B) Both will change.
C) Neither will change.
Correct answer is B)
The value of either type of swap will change over time even if market rates and prices do not change since the swap value represents the present value of a stream of cash flows.
Q10. At the inception of either an interest rate or a commodity swap, who bears the most credit risk?
A) The fixed-rate payers in both cases bear the credit risk at inception.
B) There is no credit risk at the inception of either swap.
C) The fixed-rate payer in the commodity swap and the floating-rate payer in the interest rate swap bear the credit risk at the inception of the respective swaps.
Correct answer is B)
Both swaps have a zero market value at inception, so there is no credit risk for either party in either case.
Q11. Charles Briggs, CFA, wants to effectively hedge against changes in the value of a commodity swap in which he has a position. Briggs plans to only use futures contracts. To effectively hedge the value of the swap, Briggs will need to use:
A) both commodity futures and interest rate futures.
B) interest rate futures only.
C) commodity futures only.
Correct answer is A)
Since the value of a commodity swap is the present value of a fully hedged swap, to effectively hedge the value Briggs will need to use both types of futures contracts to hedge the risk of changing commodity prices and interest rates.
Q12. To accommodate the seasonality of commodity markets, commodity swaps can incorporate:
A) only notional principals that vary with the seasons.
B) notional principals and swap prices that vary with the seasons.
C) only swap prices that vary with the seasons.
Correct answer is B)
Commodity demand, supply and prices can be seasonal. For a swap with more than one settlement per year (e.g., semiannual) the counterparties can elect to incorporate varying notional principals and prices into the commodity swap contract. In the case of oil, there might be one pair of values for the notional principal and swap price for winter and one pair of values for summer.
| 
发表于 2009-3-11 10:27
| 
