invic

Mark Roberts anticipates utilizing a floating rate line of credit in 90 days to purchase $10 million of raw materials. To get protection against any increase in the expected London Interbank Offered Rate (LIBOR) yield curve, Roberts should:

A) buy a receiver swaption.

B) buy a payer swaption.

C) write a receiver swaption.

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A payer swaption will give Roberts the right to pay a fixed rate below market if rates rise

invic

An investor who anticipates the need to exit a pay-fixed interest rate swap prior to expiration might:

A) buy a payer swaption.

B) sell a payer swaption.

C) buy a receiver swaption.

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A receiver swaption will, if exercised, provide a fixed payment to offset the investor’s fixed obligation, and allow him to pay floating rates if they decrease.

invic

Which of the following statements regarding swaptions is least accurate? A swaption is often used to:

A) create a synthetic bond position.

B) hedge the rate on an anticipated swap transaction.

C) provide the right to terminate a swap.

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A swaption is like an option on a bond with payments equal to the fixed payments on the swap. The others are common uses of swaps.

invic

Which of the following is least likely to be a use of a swaption?

A) Exiting an offsetting swap at the exercise date.

B) Hedging the risk of a current fixed-rate commitment.

C) Hedging the risk of an anticipated floating-rate obligation.

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Swaptions will not be a good hedge for a current obligation since the swaption is for a swap in the future.

invic

Wanda Brunner, CFA, is contemplating adding a swaption to her portfolio. Which of the following is least likely her goal?

A) interest rate speculation.

B) provide short-term liquidity.

C) lock in a fixed rate.

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The three primary uses of swaptions are to lock in a fixed rate, interest rate speculation, and swap termination.

invic

Wanda Brunner, CFA, is contemplating adding a swaption to her portfolio. Which of the following is least likely her goal?

A) interest rate speculation.

B) provide short-term liquidity.

C) lock in a fixed rate.

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The three primary uses of swaptions are to lock in a fixed rate, interest rate speculation, and swap termination.

invic

Consider a 3-year quarterly-pay bond to be issued in 180 days with a 7% coupon. A 180-day put option on this bond, with an exercise price rate of 7%, has a payoff equal to that of a:

A) receiver swap.

B) receiver swaption.

C) payer swaption.

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The payoff on a payer swaption is equivalent to that of a put option on a bond as described in the question.

invic

Wanda Brunner, CFA, is contemplating adding a swaption to her portfolio. She makes the following two statements about the possible payoffs and cash flows of an interest rate swaption:

Statement 1:	Exercising an in-the-money swaption effectively generates an annuity over the term of the underlying swap.
Statement 2:	A positive payoff to a receiver swaption each quarter is the interest saved by receiving the higher fixed rate.

Which of the following statements are CORRECT?

A) Both statements are correct.

B) Only statement 1 is correct.

C) Only statement 2 is correct.

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Exercising an in-the-money swaption effectively generates an annuity over the term of the underlying swap. The amount of each annuity payment is the interest savings that result from paying a rate lower than the market rate under a payer swaption or the extra interest that results from receiving a higher rate under a receiver swaption.

invic

The LIBOR yield curve is:

180-days	5.2%
360-days	5.4%

What is the value of a 1-year semiannual-pay LIBOR based receiver swaption (expiring today) on a $10 million 1-year 4.8% swap?

A) $0.

B) $50,712.

C) -$50,712.

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First, find the discount factors. 1/(1+(0.052×(180/360))) = 0.97465887 and 1/(1+(0.054×(360/360))) = 0.94876660 Calculate the market fixed rate payments: (1 - 0.94876660) / (0.97465887 + 0.94876660) = 0.026637 and compare to the exercise rate payments 0.024. The value of the receiver swaption is zero since the exercise rate is below the market rate.

invic

The London Interbank Offered Rate (LIBOR) yield curve is:

• 180-days: 5.2%.
• 360-days: 5.4%.

What is the value of a LIBOR-based payer swaption (expiring today) on a $10 million 1-year 4.8% swap?

A) −$50,712.

B) $0.

C) $50,712.

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• Determine the discount factors.
  
  180 day: 1 / [1 + (0.052 × (180 / 360))] = 0.974659
  360 day: 1 / [1 + (0.054 × (360 / 360))] = 0.948767
• Then, plug as follows:
  
  (1 − 0.9487666) / (0.974659 + 0.9487667) = 0.026637
• The value of the payer swaption is the savings between the exercise rate and the market rate:

(0.026637 − 0.024) × (0.97465887 + 0.9487666) × 10,000,000 = $50,712.