Portfolio Management【 Reading 57】Sample either, 2012

HuskyGrad2010

At the inception of a market-rate plain vanilla swap, the value of the swap to the fixed-rate payer is:

A) either positive or negative.

B) positive.

C) zero.

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A market-rate swap is priced so that the value to either side is zero at the inception of the swap

HuskyGrad2010

Over the life of a swap, the price of the swap:

A) does not change.

B) fluctuates with changes in the yield curve.

C) is approximately equal to the market value of the swap.

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The price of a swap, quoted as the fixed rate in the swap, is determined at contract initiation and remains fixed for the life of the swap.

soverby

The price of an interest rate swap is the:

A) cost to purchase a swap.

B) fixed rate of interest.

C) market value of the swap.

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The price of an interest rate swap is quoted as the rate on the fixed-rate payments. The floating rate is a known reference rate, such as London Interbank Offered Rate (LIBOR), but does not need to be quoted.

soverby

The fixed-rate on a semiannual 2-year interest rate swap is closest to the:

A) current 180-day T-bill rate.

B) coupon rate on a 2-year par bond with the same credit risk as the fixed-rate payer.

C) coupon rate on a 2-year par bond with the same credit risk as the reference rate.

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The fixed-rate on a swap is calculated using the yield curve for the floating rate reference, usually London Interbank Offered Rate (LIBOR). Therefore, the fixed rate reflects the credit spread of that rate over the riskless rate of return.

soverby

The fixed-rate payer in an interest-rate swap has a position equivalent to a series of:

A) short interest-rate puts and long interest-rate calls.

B) long interest-puts and short interest-rate calls.

C) long interest-rate puts and calls.

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The fixed-rate payer has profits when short rates rise and losses when short rates fall, equivalent to writing puts and buying calls.

soverby

The fixed-rate receiver in a plain vanilla interest rate swap has a position equivalent to a series of:

A) long interest-rate puts.

B) short interest-puts and long interest-rate calls.

C) long interest-rate puts and short interest-rate calls.

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The fixed-rate receiver has profits when short rates fall and losses when short rates rise, equivalent to buying puts and writing calls.

soverby

For a 1-year quarterly-pay swap, an equivalent position with short puts and long calls would involve:

A) put-call combinations expiring on each of the four settlement dates.

B) three put-call combinations expiring on the first three settlement dates of the swap.

C) three put-call combinations on the last three settlement dates of the swap.

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Interest rate options pay one period after exercise. Options expiring on settlements at t = 1,2,3, will mimic the uncertain swap payments at t = 2,3,4.

soverby

Writing a series of interest-rate puts and buying a series of interest-rate calls, all at the same exercise rate, is equivalent to:

A) being the fixed-rate payer in an interest rate swap.

B) being the floating-rate payer in an interest rate swap.

C) a short position in a series of forward rate agreements.

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A short position in interest rate puts will have a negative payoff when rates are below the exercise rate; the calls will have positive payoffs when rates exceed the exercise rate. This mirrors the payoffs of the fixed-rate payer who will receive positive net payments when settlement rates are above the fixed rate.

soverby

An off-market forward rate agreement (FRA):

A) provides a series of payments.

B) has a positive value at contract initiation.

C) cannot be priced with market rates.

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An off-market FRA has a contract rate that differs from the zero-value rate at the inception of the contract; by definition, it has a positive value to one of the parties to the FRA.

soverby

Suppose a forward rate agreement (FRA) calls for the exchange of six-month London Interbank Offered Rate (LIBOR) two years from now for a payment of a fixed rate of interest of 6%. Which of the following structures is equivalent to this long FRA? A long:

A) put and a short call on LIBOR with a strike rate of 6% and two years to expiration.

B) call on LIBOR with a strike rate of 6% and eighteen months to expiration.

C) call and a short put on LIBOR with a strike rate of 6% and two years to expiration.

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The strike rate of the options corresponds to the fixed rate of the FRA. The expiration of the option coincides with the determination date of the LIBOR-based payment which is paid two years from now.