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Student: ___________________________________________________________________________

1.

The term interest rate swap
A. refers to a "single-currency interest rate swap" shortened to "interest rate swap".
B. involves "counterparties" who make a contractual agreement to exchange cash flows at periodic
intervals.
C. can be "fixed-for-floating rate" or "fixed-for-fixed rate".
D. all of the above

2.

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:
Afixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a
. floating-rate debt obligations for fixed-rate interest payments of the other counter party.
Bfixed-for-fixed rate debt service (currency swap), where one counterparty exchanges the debt service
. obligations of a bond denominated in one currency for the debt service obligations of the other counter
party denominated in another currency.
C. both a and b
D. none of the above

3.

The primary reasons for a counterparty to use a currency swap are
A. to hedge and to speculate.
B. to play in the futures and forward markets.
Cto obtain debt financing in the swapped currency at an interest cost reduction brought about through
. comparative advantages each counterparty has in its national capital market, and the benefit of hedging
long-run exchange rate exposure.
D. both a and b

4.

The size of the swap market is
A. measured by notational principal.
B. over 7 trillion dollars.
C. both a and b
D. none of the above

5.

Which combination of the following statements is true about a swap bank?
(i) - it is a generic term to describe a financial institution that facilitates swaps between counterparties
(ii) - it can be an international commercial bank
(iii) - it can be an investment bank
(iv) - it can be a merchant bank
(v) - it can be an independent operator
A. (i) and (ii)
B. (i), (ii) and (iii)
C. (i), (ii), (iii) and (iv)
D. (i), (ii), (iii), (iv) and (v)

6.

A swap bank
A. can act as a broker, bringing together counterparties to a swap.
B. can act as a dealer, standing ready to buy and sell swaps.
C. both a and b
D. only sometimes a but never ever b

7.

In the swap market, which position potentially carries greater risks, broker or dealer?
A. Broker
B. Dealer
C. They are the same swaps, therefore the same risks.

8.

Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent. The means
A. the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving sixmonth dollar LIBOR.
B. the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying sixmonth dollar LIBOR.
C. both a and b
D. none of the above

9.

Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent. The means
A. the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving sixmonth dollar LIBOR.
B. the swap bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying sixmonth dollar LIBOR.
C if the swap bank is successful in getting counterparties to both legs of the swap at these prices, he will
. have an annual profit of ten basis points.
D. none of the above

10. A swap bank makes the following quotes for 5-year swaps and AAA-rated firms:

A. The bank stands ready to pay $5.2% against receiving dollar LIBOR on 5-year loans.
B. The bank stands ready to receive €7% against receiving dollar LIBOR on 5-year loans.
C. The bank stands ready to pay €7% against receiving dollar LIBOR on 5-year loans.
D. None of the above
11. Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent in dollars and
6.60—6.80 percent in euro against six-month dollar LIBOR. The means
Athe swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar
. payments of 8.50 percent against receiving semiannual fixed-rate euro payments of 6.80.
Bthe swap bank will enter into a currency swap in which it would pay semiannual fixed-rate euro
. payments of 6.60 percent against receiving semiannual fixed-rate dollar payments of 8.60.
C. both a and b
D. none of the above
12. An interest-only single currency interest rate swap
A. is also known as a plain vanilla swap.
B. is also known as an interest rate swap.
C. is about as simple as swaps can get.
D. all of the above
13. Company X and company Y have mirror-image financing needs (they both want to borrow equivalent
amounts for the same amount of time. Company X has a AAA credit rating, but company Y's credit
standing is considerably lower.
A. Company X should demand most of the QSD in any swap with Y as compensation for default risk.
B. Since Y has a poor credit rating, it would not be a participant in the swap market.
C. Company X should more readily agree to a swap involving Y if there is also a swap bank providing
credit risk intermediation.
D. both a and c

14. A swap bank has identified two companies with mirror-image financing needs (they both want to borrow
equivalent amounts for the same amount of time. Company X has agreed to one leg of the swap but
company Y is "playing hard to get".
A If the swap bank has already contracted one leg of the swap, they should be anxious to offer better
. terms to company Y to just get the deal done.
B. The swap bank could just sell the company X side of the swap.
C. Company X should lobby Y to "get on board".
D. Both a and b
15. A swap bank has identified two companies with mirror-image financing needs (they both want to borrow
equivalent amounts for the same amount of time. Company X has agreed to one leg of the swap but
company Y is "playing hard to get".
A. The swap bank could just sell the company X side of the swap.
B. Company X should lobby Y to "get on board".
C. Company Y should calculate the QSD and subtract that from their best outside offer.
D. None of the above
16. Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000
fixed for 5 years. Their external borrowing opportunities are shown below:

A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on
$10,000,000 with the coupon rate of LIBOR - 0.15%; in exchange the swap bank will pay to company X
interest payments on $10,000,000 at a fixed rate of 9.90%.
What is the value of this swap to company X?
A. Company X will lose money on the deal.
B. Company X will save 25 basis points per year on $10,000,000 = $25,000 per year.
C. Company X will only break even on the deal.
D. Company X will save 5 basis points per year on $10,000,000 = $5,000 per year.
17. Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000
fixed for 5 years. Their external borrowing opportunities are shown below:

A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on
$10,000,000 with a fixed rate of rate of 9.90%.in exchange the swap bank will pay to company Y interest
payments on $10,000,000 at LIBOR - 0.15%;
What is the value of this swap to company Y?
A. Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year.
B. Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year.
C. Company Y will save 5 basis points per year on $10,000,000 = $5,000 per year.
D. Company Y will only break even on the deal.

18. Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000
fixed for 5 years. Their external borrowing opportunities are shown below:

A swap bank proposes the following interest only swap:
X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%;
in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of
9.90%. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the
swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR - 0.15%.

What is the value of this swap to the swap bank?
A. The swap bank will lose money on the deal.
B. The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year.
C. The swap bank will break even.
D. None of the above

000. The swap bank will earn 40 basis points per year on $10. The swap bank will LOSE money.30% and the swap bank will pay Y annual payments on $10.000.15%.05%. in exchange the swap bank will pay to company X interest payments on $10.000. company Y wants to borrow $10. D.19. Y will pay the swap bank interest payments on $10.000 floating for 5 years.000.000 per year.000. None of the above . B.000.000. The swap bank will earn 10 basis points per year on $10.000 at a fixed rate of 10. Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10.000 with the coupon rate of LIBOR. Company X wants to borrow $10.000 with the coupon rate of LIBOR .000. What is the value of this swap to the swap bank? A.000 per year. C.000 fixed for 5 years.000 = $10.0.000 = $40.000 at a fixed rate of 10.

B = LIBOR. A. Their external borrowing opportunities are shown below: A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10. B = 10. Fill in the values for A.05%. & F on the diagram.45%.000. E = 10. D = LIBOR. A = 10%. E = 10.20. F = LIBOR + 1½% C. C = LIBOR. D. Assume both X and Y agree to the swap bank's terms. E = LIBOR. D = LIBOR.000 fixed for 5 years.05%. Company X wants to borrow $10. B = 10.05%.05%. D = LIBOR. F = LIBOR + 1½% D.000. A = LIBOR. B = 10. F = 12% B.000 floating for 5 years.45%.05%10. A = 10%. E. C = LIBOR. A = 10%. company Y wants to borrow $10.45% against LIBOR flat. C = 10.45%. C = 10. B.45%. F = LIBOR + 1½% . E = LIBOR. D = 10. C.

000.000 floating for 5 years. C. Company Y wants to borrow $10. it will receive annual fixed-rate dollar payments at 7.000 fixed for 5 years.00 . a and b D.85 annually against sixmonth dollar LIBOR for dollars. and 11. it would pay annual fixed-rate dollar payments of 7.5% in return for receiving annual fixed-rate £ payments at 11.3% B. Suppose ABC Investment Banker Ltd. ABC would enter into a $/£ currency swap in which: A. D.7. is quoting swap rates as follows: 7. Option A Option B Option C Option D 22.11.50 .000.85% against paying annual fixed-rate £ payments at 11% C.30 percent annually against six-month dollar LIBOR for British pound sterling. B. none of the above .. Their external borrowing opportunities are: Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for A = Company X's external borrowing rate B = Company Y's payment to X (rate) C = Company X's payment to Y (rate) D = Company Y's external borrowing rate A. Company X wants to borrow $10.21.

B.000 fixed for 5 years.45%-10. What are the absolute best terms the bank can offer X. none of the above.50% 2.45% against LIBOR flat.50% against LIBOR flat. 10. D. B. 10. Company X wants to borrow $10.000. D.45%-10.05% against LIBOR flat.000. 10. Assume company Y has agreed. 0. given that it already booked Y? A.00% 24. C.000 floating for 5 years.50% 1. C. but company X will only agree to the swap if the bank offers better terms. Use the following information to calculate the quality spread differential (QSD): A.05%10.45% against LIBOR flat.00% 1.23. company Y wants to borrow $10. Their external borrowing opportunities are shown below: A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10. .50%-10.

26.000 at a fixed rate of 10.80%.000 at a fixed rate of 12. The swap bank will earn 10 basis points per year. Thus interest . in exchange the swap bank will pay to company X interest payments on £5.000.5%. denominated income and dollar-denominated costs and default risk. C The swap bank will earn 10 basis points per year but has exchange rate risk: pound-denominated . the only risk is default risk. Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10.000. Swaps are said to offer market completeness AThis means that all types of debt instruments are not regularly available for all borrowers. income and pound-denominated costs and default risk. The exchange rate is $2 = £1 and is not expected to change over the next 5 years. B. C. D.80% and the swap bank will pay Y annual payments on $10. Company X wants to borrow $10. Because you can trade across both currencies and fixed and floating market segments. In that the swap market offers price discovery to the market. rate swap markets assist in tailoring financing to the type desired by a particular borrower.000 with the coupon rate of 12%.000 with the coupon rate of 9. What is the value of this swap to the swap bank? A. None of the above .000 for 5 years. D The swap bank will earn 20 basis points per year in dollars but has exchange rate risk: pound.25. Y will pay the swap bank interest payments on £5.000.000.000.000 for 5 years.000. company Y wants to borrow £5. income and dollar-denominated costs and default risk. B The swap bank will earn 10 basis points per year but has exchange rate risk: dollar-denominated .

QSD = [€7% . company A borrows at 6% in euro but company B borrows at 8% in dollars C.000 for one year and B wants to borrow $2. $ at ask and € at bid. None of the above . bank. is $2.00 = €1.27.S.000. Firms A and B would each save 90bp and the swap bank would earn 20bp. $ at ask and € at bid.000.000 for one year. No. B by 1% on $2m and $2. company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate . Firms A and B would each save 90bp and the swap bank would earn 20bp. The spot exchange rate is $2.-based MNC with AAA credit.($8% .00 = €1.$9%) = $2% + $1% = $3% B. B.000.00—A is twice as better off as B 28. There is no mutually beneficial swap at these prices. $ at bid and € at ask.000 for one year and B wants to borrow $2. bank. Firm A wants to borrow €1. A is a U. D. A will be better off by €1% on €1m.and euro-based borrowing opportunities of companies A and B. $ at bid and € at ask.000 for one year.00 = €1. B is an Italian firm with AAA credit.00 and the one-year forward rate is given by IRP as: Suppose they agree to the swap shown at right.€6% × $2.00/€1. Consider the dollar. Yes.S.00 D No.00 = €1.000. The spot exchange rate is $2.-based MNC with AAA credit. Is this mutually beneficial swap equally fair to both parties? A. B is an Italian firm with AAA credit. Firm B does 2 swaps with the swap . Firm A wants to borrow €1. Yes.00 .00. CFirm A does 2 swaps with the swap bank. a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR: The firms external borrowing opportunities are: AFirm A does 2 swaps with the swap bank. Firm B does 2 swaps with the swap . A is a U.

Consider the dollar. Yes.000 for one year.$9%) = $2% + $1% = $3% D. sending a market order to a swap dealer. finding the difference between the present values of the payments streams the party will receive and pay.08)/€1. B is an Italian firm with AAA credit.00/€1. A is a U.$9%) × €1.00 and the one-year forward rate is given by IRP as $2.00 × (1.and euro-based borrowing opportunities of companies A and B.29.0377/€1. currency and pay in the other currency. Pricing an interest-only single currency swap after inception involves A.($8% .00/$2.S. Firm A wants to borrow €1. converted to a common currency.€6%] .00 = €1½% 30.6%) .€6%] × $2. QSD = 2% = (7% . No.(8% . Is there a mutually beneficial swap? A.06) = $2.00 = €1. QSD = 0 B.($8% . The spot exchange rate is $2. none of the above .000 for one year and B wants to borrow $2.000. QSD = [€7% . QSD = [€7% .00 . Yes.00 × (1.-based MNC with AAA credit.9%) = 1% .(-1%) C. D. B. C finding the sum of the present values of the payments streams that each party will receive in one . Yes.000.

The exchange rate is $2 = £1 and is not expected to change over the next 5 years. B = £12%.000.000 floating for 5 years.50% interest-only for five years.000 at a fixed rate of 12.000 at 10.000. B = £13%.50% interest-only for five years. Their external borrowing opportunities are: A swap bank proposes the following interest-only swap: Company X will pay the swap bank annual payments on $10.000. The exchange rate is $2 = £1 and is not expected to change over the next 5 years. A = $10.000 at a fixed rate of 10.80% and the swap bank will pay Y annual payments on $10. B = $12%.000 fixed for 5 years. translate pounds to dollars at . If company X takes on the swap. B.000. Company X wants to borrow $10. translate pounds to dollars at the spot rate. B.000 at an interest rate of $9.000 fixed for 5 years.000. Y will pay the swap bank interest payments on £5.000.000.000.000. what external actions should they engage in? A.000 floating for 5 years. in exchange the swap bank will pay to company X interest payments on £5. Company X wants to borrow $10. None of the above 32. company Y wants to borrow £5. They should borrow $10. In order for X and Y to be interested. they can face no exchange rate risk What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y? A.000 at $10%. Their external borrowing opportunities are: A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap.000 at £10. enter long position in a forward contract to buy £5. company Y wants to borrow £5.000. . the spot rate.000 in five years. A = $12%.5%. C. A = $10%. A = £10. They should borrow £5. B = £13%. CThey should borrow £5.31.50%.000 with the coupon rate of 12%.000. D.000.50%. D.80%.

In the problem just previous. C. Company X wants to borrow $10. B = $9%.06) = $2. C finding the sum of the present values of the payments streams that each party will receive in one .000. B. both a and b D. A = $7%. A = $8%. B = £7%. A = £7%. B. none of the above . C. company Y wants to borrow £5. Pricing a currency swap after inception involves Afinding the difference between the present values of the payments streams the party will receive in one . is probably British.000. company X A. currency and pay in the other currency.000 floating for 1 year. B = £6%. B. both a and c 36.000 fixed for 1 year. A = $8%. sending a market order to a swap dealer. converted to a common currency. In a currency swap A.0377/£1. In order for X and Y to be interested. none of the above 34. D. currency and pay in the other currency.00 × (1. C. B = £8%. it may be the case that firms have a comparative advantage in borrowing in their domestic markets. Their external borrowing opportunities are: A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. it may be the case that two counterparties have equivalent credit ratings. B.33. D. 35.00 × (1. they can face no exchange rate risk What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y? A. converted to a common currency. The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as $2. is probably American. D.08)/£1. has a comparative advantage in borrowing pounds.

000. none of the above 40. then exchange it for . none of the above . offer the swap bank a built-in hedge. The must also hedge with forward contracts on the currency. C. C. Compute the payments due in the second year on a three-year AMORTIZING swap from company B to company A. none of the above 39. A. Company A and company B both want to borrow £1. dollar LIBOR versus euro LIBOR. C. A wants to borrow floating and B wants to borrow fixed.000 for three years. the reference rates are different for the different currencies: e.80 to A B pays £100.000 to A B pays £69.000 to A B pays £69. A and B agree to split the QSD. Floating for floating currency swaps A. B pays £402. B.114. When an interest-only swap is established on an amortizing basis A. C. D. the debt service exchanges are the same each year. A wants to borrow floating and B wants to borrow fixed.52 to A None of the above 41. both a and b D. do not exist. B pays £402. In an interest-only currency swap Athe counterparties must raise the actual notational principal in their home markets. D. Compute the payments due in the FIRST year on a three-year AMORTIZING swap from company B to company A. but the level of interest and principal changes as the loans amortize. the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized. A and B agree to split the QSD. Company A and company B both want to borrow £1. D.788.52 to A None of the above 38. there is no such thing as an amortizing interest-only swap.788. D.000.000 for three years.80 to A B pays £100. the counterparties periodically exchange the amortized portions of the notational principals.37.g. B. A. B. C. B. the foreign currency they desire. B.114.

can be explained by the set of international parity relationships. (iii). (iii). A. (iii).000.000 C. Floating for floating currency swaps A.exchange rate risk (iv) . dollar LIBOR versus euro LIBOR. mid-way through the 6 year agreement). (ii). none of the above 48. But only if the bid-ask spreads are wide. and (v) 47. none of the above 43.g. This is A. B. B. B. the probability that both counterparties default. C. the reference rates can be the same but have different frequencies. none of the above 45. SFr248. A major that can be eliminated through a swap is exchange rate risk. A major risk faced by a swap dealer is credit risk.sovereign risk A. Which combination of the following represent the risks that a swap dealer confronts: (i) . (i).½ percent. None of the above 49. none of the above . D. (i).e.42. (iv). the probability that a foreign counterparty will default in a currency swap. (iii). and (iv) D. C. the probability that a counterparty will default. Amortizing currency swaps A. (iv).700. D.000 and receive LIBOR . (ii). B. This is A. As of the third reset date (i. But only to the extent that a foreign counterparty will NOT default in a currency swap. disappear when controlling for volatility. and (iv) C. D. both a and b D. 44.685 B. B. B. A major risk faced by a swap dealer is exchange rate risk. the probability floating rates will move against the dealer.300. the probability exchange rates will move against the dealer. calculate the price of the swap.political risk (v) . Nominal differences in currency swaps A.basis risk (iii) . D. the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized. can be explained by the quality spread differential. A.000 D. C. (i). assuming that the fixed-rate at which XYZ can borrow has increased to 10%. C. But swaps can be less efficient in this than just trading at the expected spot exchange rates each year. can be explained by the credit risk differentials.interest rate risk (ii) . SFr2. the reference rates are different for the different currencies: e. the probability that either counterparty defaults in a currency swap. C.000 46. SFr7. incorporate an amortization feature in which periodically the amortized portions of the notational principals are re-exchanged. XYZ Corporation enters into a 6-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed-rate of 9 percent annually on a notional amount of SFr10. C. and (v) B. SFr900. both a and b D.

C. D. the probability that a sovereign counterparty will default. and "sovereign risk" refers to a situation in . the probability floating rates and exchange rates will NOT move together. to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. The swap bank stands willing to accept either side of a swap. When a swap bank serves as a dealer: A. none of the above 54. C. This is A. C. the probability that a country will impose exchange restrictions on a currency involved in an existing swap. B. none of the above 51. involved in a swap. B. the difficulty in finding a second counterparty for a swap that the bank has agreed to take with another party. This is A.50. and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk. 52. C"basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an opposing ." They are defined as A"basis risk" refers to the probability that a country will impose exchange restrictions on a currency . and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index. because A it implies that an arbitrage opportunity exists because of some mispricing of the default risk premiums . on different types of debt instruments. A major risk faced by a swap dealer is sovereign risk. which the floating rates of the two counterparties are not pegged to the same index. D. the probability that both counterparties default. B. B. different maturities of forward contracts. D"basis risk" refers to the risk of fluctuating exchange rates. The swap bank matches counterparties but does not assume any risk of the swap. None of the above 55. The swap bank receives a commission for matching buyers and sellers. B it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on . None of the above . The swap bank matches counterparties but does not assume any risk of the swap. D. When a swap bank serves as a broker: A. B"basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged . C. D. the probability governments will intervene to support an exchange rate. C. counterparty the other side of an interest rate swap entered into with a counterparty. none of the above 53. A major risk faced by a swap dealer is mismatch risk. The swap bank stands willing to accept either side of a swap. The swap bank receives a commission for matching buyers and sellers. In an efficient market without barriers to capital flows. the cost-savings argument of the QSD is difficult to accept.

agrees to swap LIBOR to B for 8½% fixed . LIBOR C. ½ % fixed for 5 years on a notational principal of $5 million. $90. Consider a plain vanilla interest rate swap. determine the price of the swap from the bank's point of view assuming that the fixed-rate side of the swap has increased to 11 percent.090. D Firm A should borrow $4 million in dollars.S.00. Consider bank that has entered into a five-year swap on a notational balance of $10.09 gain. Firm A can borrow dollars at $10% and pounds sterling at 12%. 59. Firm A can borrow at 8% fixed or can borrow floating at LIBOR. B. who in turn borrows 4 . pay 11% in pounds to Firm B. DA borrows $10 million externally at 8% fixed for 5 years. Consider fixed-for-fixed currency swap. Which of the following swaps is mutually beneficial to each party and meets their financing needs? AFirm A borrows $10 million externally for 5 years at LIBOR. million pounds and pays 8% in dollars to A. Eun wants to borrow floating and Resnick prefers to borrow fixed. C Firm A should borrow $2 million in dollars. who in turn borrows 2 . Both corporations wish to borrow $10 million for 5 years. LIBOR . C. years on a notational principal of $5 million. for 5 years on a notational principal of $5 million. Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk. Firm B is a U. agrees to pay 8½% to B for LIBOR fixed for 5 .56. $90.090. No loss or no gain since maturity has not arrived. B borrows $10 million externally at LIBOR + 1%. D. There is no mutually beneficial swap that has neither party facing exchange rate risk. 58.91 gain.000 with a corporate customer who has agreed to pay a fixed payment of 10 percent in exchange for LIBOR. B borrows $10 million externally at 10%. A.-based multinational. B borrows $10 million externally at 10%. B Firm A should borrow $4 million in dollars. Firm A wants to finance a £2 million expansion in Great Britain. As of the fourth reset date.090.-based multinational. None of the above . C. pay 11% in pounds to Firm B.09 loss.½ percent D. Firm B can borrow dollars at 9% and pounds sterling at 11%. who in turn borrows 2 . Find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent. Firm B wants to finance a $4 million expansion in the U. LIBOR + ½ percent B. Firm A is a U. $909. Firm B is somewhat less creditworthy and can borrow at 10% fixed or can borrow floating at LIBOR + 1%. BA borrows $10 million externally for 5 years at LIBOR. A.000. LIBOR is at 5 percent. The spot exchange rate is £1.K. million pounds and pays 10% in dollars to A. agrees to swap LIBOR to firm B for 8 . Since the QSD = 0 there is no mutually beneficial swap. pay 11% in pounds to Firm B.00 = $2. A. million pounds and pays 8% in dollars to A. 57.S.

S. Consider a fixed for fixed currency swap. on a notational principal of £2 million. borrows £2 million pounds externally at £10%. CDow should borrow $4 million in dollars externally at $10%. Dow wants to finance a £2 million expansion in Great Britain.000.000 for five years. receive $8% from the swap bank on a notational principal of $4 million. D. the risk that a counterparty will default. 62.-based multinational. D. the risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index.60. interest rate risk refers to A. off a swap it undertakes with one counterparty with an opposing transaction. receive $10% from the swap bank on a notational principal of $4million. pays $8½% to the swap bank on a notational principal of $4 million and receives £10% in pounds from the swap bank on a notational principal of £2 million. Cthe risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay .S. You need to borrow €100. which of the following swaps is mutually beneficial to each party and meets their financing needs? ADow should borrow $4 million in dollars externally at $10%. Bthe risk that interest rates changing unfavorably before the swap bank can lay off to an opposing . Dow can borrow dollars at $10% and pounds sterling at 12%. 63. pays $10% to the swap bank on a notational principal of $4 million and receives £11% in pounds from the swap bank on a notational principal of £2 million.S. counterparty on the other side of an interest rate swap entered into with the first counterparty. on a notational principal of £2 million. and enter into a combined interest rate and currency swap with a swap bank. pay £11½ % in pounds to the swap bank . interest rate risk. D. With regard to a swap bank acting as a dealer in swap transactions.00 = $2. Jones. The Jones Corporation is a U. the risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index. The Dow Corporation is a U. BDow should borrow $4 million in dollars externally at $10%. You can either borrow the €100. B. One risk that you face by using the swap that you do not face by borrowing euros directly is A. Cthe risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay . Bthe risk that interest rates changing unfavorably before the sap bank can lay off to an opposing .S. . pays $8¾% to the swap bank on a notational principal of $4 million and receives £10% in pounds from the swap bank on a notational principal of £2 million. Assuming that the swap bank is willing to take on exchange rate risk. off a swap it undertakes with one counterparty with an opposing transaction.00. sovereign risk. 61. credit risk. D. pay £11¾% in pounds to the swap bank . borrows £2 million pounds externally at £10%.K. pay £11% in pounds to the swap bank . Jones can borrow dollars at 9% and pounds sterling at 10%. the risk that it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed take. counterparty on the other side of an interest rate swap entered into with the first counterparty. With regard to a swap bank acting as a dealer in swap transactions.000. C. on a notational principal of £2 million. receive $10% from the swap bank on a notational principal of $4 million. exchange rate risk. borrows £2 million pounds externally at £10%.-based multinational. but the other counterparties are not.000 directly in Germany or borrow dollars in the U.-based multinational. The spot exchange rate is £1. Jones wants to finance a $4 million expansion in the U. There is no swap that is possible. Jones. Jones. mismatch risk refers to A. You are the debt manager for a U.

Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown. what you be willing to pay in euro against receiving USD LIBOR? A. None of the above . 5% B.50 per €1. 4% C. 2% 65. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. In other words. In other words. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. 5% B. 4% C. 5% D. The size of the swap is €40 million versus $60 million. 6% C. Suppose that you are a swap bank and you notice that interest rates on coupon bonds are as shown.00. 2% 66. In other words. what you be willing to pay in euro against receiving USD LIBOR? A. The current spot exchange rate is $1. 3% D.64. Develop the 3-year bid price of a dollar swap quoted against flat USD LIBOR. 3% D. 7% B. Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown. what you be willing to pay in euro against receiving USD LIBOR? A.

Come up with a swap (exchange of interest and principal) for parties A and B who have the following borrowing opportunities. Italy and wishes to borrow $1. The current exchange rate is $1.e. The fourth payment has already been made. Come up with a swap (principal + interest) for two parties A and B who have the following borrowing opportunities. Company "A" wishes to borrow $1.S.95 = €1. You are a swap dealer.60 = €1.000.000 for 5 years and "B" wants to borrow €625.00. If the spot exchange rate prevailing in year 4 is $1. Suppose that the swap that you proposed in question 2 is now 4 years old (i. firm that wants to borrow €625. Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B. 68.000 for 5 years.67. . what is the value of the swap to the party paying dollars? If the swap were initiated today the correct rates would be as shown: 69. Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B. Company "A" is in Milan. The current exchange rate is $1. You are a swap dealer.00. Firms A and B are more concerned with what currency that they borrow in than whether the debt is fixed or floating.000 for 5 years at a fixed rate of interest. there is exactly one year to go on the swap).000 at a floating rate for 5 years and company "B" is a U.000.60 = €1.8778 = €1 and the 1-year forward exchange rate prevailing in year 4 is $1.

both firms have AAA credit ratings. What would be the interest rate? 74.95 = €1.S. What are the IRP 1-year and 2-year forward exchange rates? 72. .50/€. Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 7% USD loan into a 2-year euro denominated loan. The current exchange rate is $1.70.8778 = €1 and the 1-year forward exchange rate prevailing in year 4 is $1. there is exactly one year to go on the swap). MNC and wants to borrow €40 million for 2 years.e. Their borrowing opportunities are as shown. If the spot exchange rate prevailing in year 4 is $1. what is the value of the swap to the party paying dollars? If the swap were initiated today the correct rates would be as shown: Consider the situation of firm A and firm B. 73. 71. Suppose that the swap that you proposed in question 2 is now 4 years old (i. Firm A is a U. Firm B is a French MNC and wants to borrow $60 million for 2 years. Explain how this opportunity affects which swap firm A will be willing to participate in.

Show their external borrowing. What would be the interest rate? 77. .75. Explain how this opportunity affects which swap firm B will be willing to participate in. Devise a direct swap for A and B that has no swap bank. 78. Answer the problem in the template provided. 76. Explain how firm B could use the forward exchange markets to redenominate a 2-year €40m 5% euro loan into a 2-year USD-denominated loan.

00/£ Firm A is a U. if you were acting as an agent for the swap bank.79. 81. Show how your proposed swap would work for firm A. 80. (e. try to "sell" firm A on your swap) Consider the situation of firm A and firm B. 83. What are the IRP 1-year and 2-year forward exchange rates? 82. both firms have AAA credit ratings. MNC and wants to borrow £30 million for 2 years. Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan.g. The current exchange rate is $2.S. Firm B is a British MNC and wants to borrow $60 million for 2 years. What would be the interest rate? . Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and promise to make at least 20bp for your firm. Their borrowing opportunities are as shown.

84. . Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4% pound sterling loan into a 2-year USD-denominated loan. What would be the interest rate? 87. Explain how this opportunity affects which swap firm B will be willing to participate in. 86. Explain how this opportunity affects which swap firm A will be willing to participate in. 85.

Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and promise to make at least 20bp for your firm.g. Answer the problem in the template provided.88. (e. Show how your proposed swap would work for firm A. 90. if you were acting as an agent for the swap bank. 89. Show their external borrowing. try to "sell" firm A on your swap) . Devise a direct swap for A and B that has no swap bank.

B. Firm B is a British MNC and wants to borrow $60 million for 2 years.K. The term structure of interest rates is currently flat in both the U.S.95 = £1. If the swap were negotiated today the interest rates exchanged would be $8% and £11%. What is the value of the swap to the party paying dollars? Consider the situation of firm A and firm B.00/£ Firm A is a U. both firms have AAA credit ratings. 5 years.) 93.91.000. It involves exchanging interest at 14% on £20 million for interest at 10% on $14 million once a year. A wants to finance a $100. FOR YOUR SWAP (the one you have shown above) how would the swap bank quote the swap against prime? (Hint: they are quoting a bid-ask spread against "flat" prime.000 project at a FIXED rate.S. Consider the borrowing rates for Parties A and B. All rates were quoted with annual compounding. The current exchange rate is $1. and in the U. MNC and wants to borrow £30 million for 2 years. The IRP 1-year and 2-year forward exchange rates are . Both firms want the same maturity.000. B wants to finance a $100. The current exchange rate is $2. Their borrowing opportunities are as shown. and the swap bank IN EQUAL MEASURE. Construct a mutually beneficial INTEREST ONLY swap that makes money for A. An interest-only currency swap has a remaining life of 18 months.000 project at a FLOATING rate. 92.

Explain how this opportunity affects which swap firm B will be willing to participate in.94. Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4% pound sterling loan into a 2-year USD-denominated loan. 99. 95. 98. Explain how this opportunity affects which swap firm A will be willing to participate in. Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan. Explain how firm A could use two of the swaps offered above to hedge its exchange rate risk. 96. 97. Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk. .

. Their borrowing opportunities are as shown. Answer the problem in the template provided. Firm B is a British MNC and wants to borrow $60 million for 2 years.Consider the situation of firm A and firm B.100.00/£ Firm A is a U. both firms have AAA credit ratings. MNC and wants to borrow £30 million for 2 years. Show their external borrowing. The IRP 1-year and 2-year forward exchange rates are Devise a direct swap for A and B that has no swap bank. The current exchange rate is $2.S.

Which combination of the following statements is true about a swap bank? (i) . where one counterparty exchanges the interest payments of . both a and b D. all of the above Eun . (iv) and (v) Eun . none of the above Eun .Chapter 14 #3 Topic: Types of Swaps 4.14 Key 1.Chapter 14 #5 Topic: The Swap Bank 6. and the benefit of hedging long-run exchange rate exposure. both a and b D.it is a generic term to describe a financial institution that facilitates swaps between counterparties (ii) . none of the above Eun . C. B. (iii). comparative advantages each counterparty has in its national capital market. refers to a "single-currency interest rate swap" shortened to "interest rate swap".it can be an international commercial bank (iii) . can act as a dealer. B. C. a floating-rate debt obligations for fixed-rate interest payments of the other counter party. The size of the swap market is A. Cto obtain debt financing in the swapped currency at an interest cost reduction brought about through . obligations of a bond denominated in one currency for the debt service obligations of the other counter party denominated in another currency. involves "counterparties" who make a contractual agreement to exchange cash flows at periodic intervals. bringing together counterparties to a swap. D. The term interest rate swap A.it can be an independent operator A. (ii) and (iii) C. (ii). A swap bank A. over 7 trillion dollars. both a and b D. measured by notational principal. can act as a broker. Bfixed-for-fixed rate debt service (currency swap).Chapter 14 #1 Topic: Types of Swaps 2.Chapter 14 #4 Topic: Size of the Swap Market 5. can be "fixed-for-floating rate" or "fixed-for-fixed rate". C. (i) and (ii) B. B. Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are: Afixed-for-floating rate interest rate swap.it can be an investment bank (iv) . (ii). to hedge and to speculate. The primary reasons for a counterparty to use a currency swap are A. where one counterparty exchanges the debt service . only sometimes a but never ever b Eun . C. B.Chapter 14 #6 Topic: The Swap Bank .Chapter 14 #2 Topic: Types of Swaps 3. standing ready to buy and sell swaps. (i). (i). to play in the futures and forward markets. both a and b Eun . (iii) and (iv) D. D.it can be a merchant bank (v) . (i).

C.60. is also known as an interest rate swap.Chapter 14 #10 Topic: Swap Market Quotations 11.Chapter 14 #8 Topic: Swap Market Quotations 9. The means Athe swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar . all of the above Eun . D. Eun . C.50—8.7. the swap bank will pay semiannual fixed-rate dollar payments of 8. Suppose the quote for a five-year swap with semiannual payments is 8. is about as simple as swaps can get.60 percent against receiving sixmonth dollar LIBOR. the swap bank will receive semiannual fixed-rate dollar payments of 8. C. is also known as a plain vanilla swap.50—8. The means A. both a and b D.60 percent against receiving semiannual fixed-rate dollar payments of 8.2% against receiving dollar LIBOR on 5-year loans. The bank stands ready to receive €7% against receiving dollar LIBOR on 5-year loans. he . Suppose the quote for a five-year swap with semiannual payments is 8. both a and b D. will have an annual profit of ten basis points. B.50 percent against paying six-month dollar LIBOR.50—8.60—6.Chapter 14 #7 Topic: The Swap Bank 8. C. D. payments of 6.50 percent against receiving sixmonth dollar LIBOR. which position potentially carries greater risks. A swap bank makes the following quotes for 5-year swaps and AAA-rated firms: A. broker or dealer? A. therefore the same risks.60 percent against paying six-month dollar LIBOR. Bthe swap bank will enter into a currency swap in which it would pay semiannual fixed-rate euro . None of the above Eun . They are the same swaps. the swap bank will pay semiannual fixed-rate dollar payments of 8. B. The bank stands ready to pay $5. The bank stands ready to pay €7% against receiving dollar LIBOR on 5-year loans.50 percent against receiving semiannual fixed-rate euro payments of 6.60 percent in dollars and 6. payments of 8.Chapter 14 #11 Topic: Swap Market Quotations 12. none of the above Eun .60 percent. In the swap market. none of the above Eun . D. An interest-only single currency interest rate swap A. B.80 percent in euro against six-month dollar LIBOR. the swap bank will receive semiannual fixed-rate dollar payments of 8. B.Chapter 14 #9 Topic: Swap Market Quotations 10.Chapter 14 #12 Topic: Interest Rate Swaps . Dealer C.60 percent. C if the swap bank is successful in getting counterparties to both legs of the swap at these prices. none of the above Eun . Broker B. The means A.80. Suppose the quote for a five-year swap with semiannual payments is 8.

D. A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time. A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.000 = $25.000. Company X wants to borrow $10.000 fixed for 5 years.000. Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time. A If the swap bank has already contracted one leg of the swap. C. A. Company X will save 25 basis points per year on $10.Chapter 14 #14 Topic: Basic Interest Rate Swap 15. Company X has agreed to one leg of the swap but company Y is "playing hard to get". they should be anxious to offer better .Chapter 14 #13 Topic: Interest Rate Swaps 14. None of the above Eun .000. but company Y's credit standing is considerably lower. Both a and b Eun . Since Y has a poor credit rating. B. D. company Y wants to borrow $10. B. Company Y should calculate the QSD and subtract that from their best outside offer. in exchange the swap bank will pay to company X interest payments on $10. A. Company X has a AAA credit rating. D. Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation. B.000 = $5.Chapter 14 #16 Topic: Basic Interest Rate Swap .000 per year. D. C.000.000 per year.Chapter 14 #15 Topic: Basic Interest Rate Swap 16. C. Company X has agreed to one leg of the swap but company Y is "playing hard to get". C. both a and c Eun .000.000 at a fixed rate of 9. it would not be a participant in the swap market. Company X should lobby Y to "get on board". Company X should lobby Y to "get on board". Company X will save 5 basis points per year on $10.15%. The swap bank could just sell the company X side of the swap. Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10. Company X will lose money on the deal. The swap bank could just sell the company X side of the swap. Company X should demand most of the QSD in any swap with Y as compensation for default risk.90%.000. B. Eun .000 with the coupon rate of LIBOR .0.000 floating for 5 years. What is the value of this swap to company X? A. terms to company Y to just get the deal done.13. Company X will only break even on the deal.

000 at a fixed rate of 9.000. D.000 fixed for 5 years. Company Y will save 5 basis points per year on $10.in exchange the swap bank will pay to company Y interest payments on $10. Company X wants to borrow $10. C.000 with the coupon rate of LIBOR . What is the value of this swap to company Y? A.90%. Company X wants to borrow $10.000 per year.0.15%.000 per year. Eun . Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10.15%.000.000.30% and the swap bank will pay Y annual payments on $10.0.Chapter 14 #18 Topic: Basic Interest Rate Swap .000.000. B.000. in exchange the swap bank will pay to company X interest payments on $10.000.000 = $5.000 floating for 5 years.000. company Y wants to borrow $10. B. The swap bank will lose money on the deal. Company Y will only break even on the deal. D.000 = $45.15%.90%. C. What is the value of this swap to the swap bank? A.000 = $15.000 with a fixed rate of rate of 9.000 floating for 5 years.000.Chapter 14 #17 Topic: Basic Interest Rate Swap 18.000 at LIBOR . None of the above Eun .000. Company Y will save 45 basis points per year on $10. company Y wants to borrow $10.0.17.000.000. Company Y will save 15 basis points per year on $10. The swap bank will earn 40 basis points per year on $10. The swap bank will break even.000.000 fixed for 5 years. Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10.000 per year.000 with the coupon rate of LIBOR .000 per year.000 = $40.000 at a fixed rate of 10.000. Y will pay the swap bank interest payments on $10.

The swap bank will earn 40 basis points per year on $10.000. in exchange the swap bank will pay to company X interest payments on $10.05%. What is the value of this swap to the swap bank? A. Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10.000 per year. The swap bank will LOSE money.000 at a fixed rate of 10.000 with the coupon rate of LIBOR . company Y wants to borrow $10. C.15%.Chapter 14 #19 Topic: Basic Interest Rate Swap .000 floating for 5 years.19.000 = $40.000 with the coupon rate of LIBOR.30% and the swap bank will pay Y annual payments on $10.000.000.000. Company X wants to borrow $10.000.000. The swap bank will earn 10 basis points per year on $10. None of the above Eun .000 per year.000 at a fixed rate of 10.0. B.000 = $10.000 fixed for 5 years.000.000. Y will pay the swap bank interest payments on $10. D.

000. A = 10%. F = LIBOR + 1½% Eun . B = LIBOR.05%. Fill in the values for A. E = 10.05%. Their external borrowing opportunities are shown below: A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.45%. Assume both X and Y agree to the swap bank's terms. C = LIBOR.45% against LIBOR flat. A = 10%. & F on the diagram. D = LIBOR. F = 12% B. C = 10. D = LIBOR. Company X wants to borrow $10. D. A.Chapter 14 #20 Topic: Basic Interest Rate Swap . B = 10. company Y wants to borrow $10.000 floating for 5 years.45%. C = LIBOR. E = LIBOR. D = LIBOR. B. B = 10.05%10. F = LIBOR + 1½% D. C.05%.05%.000 fixed for 5 years. A = 10%. D = 10. C = 10. B = 10. E = 10.000.20.45%. A = LIBOR. E. E = LIBOR. F = LIBOR + 1½% C.45%.

7. D.. Their external borrowing opportunities are: Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for A = Company X's external borrowing rate B = Company Y's payment to X (rate) C = Company X's payment to Y (rate) D = Company Y's external borrowing rate A. Company X wants to borrow $10.11.Chapter 14 #22 Topic: Basic Interest Rate Swap .000. Company Y wants to borrow $10. a and b D. B.5% in return for receiving annual fixed-rate £ payments at 11.000. Option A Option B Option C Option D Eun .30 percent annually against six-month dollar LIBOR for British pound sterling.85 annually against six-month dollar LIBOR for dollars. none of the above Eun . C.000 fixed for 5 years. it will receive annual fixed-rate dollar payments at 7.85% against paying annual fixed-rate £ payments at 11% C. is quoting swap rates as follows: 7. it would pay annual fixed-rate dollar payments of 7. Suppose ABC Investment Banker Ltd.00 .Chapter 14 #21 Topic: Basic Interest Rate Swap 22.50 .000 floating for 5 years.21. and 11.3% B. ABC would enter into a $/£ currency swap in which: A.

Their external borrowing opportunities are shown below: A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10. Company X wants to borrow $10. B. C. Assume company Y has agreed.000.05%10.000 floating for 5 years. B.45%-10. 0.00% 1. 10.50% against LIBOR flat. C.00% Eun . but company X will only agree to the swap if the bank offers better terms.Chapter 14 #24 Topic: Basic Interest Rate Swap .05% against LIBOR flat.000 fixed for 5 years. company Y wants to borrow $10.45% against LIBOR flat. Eun . given that it already booked Y? A.50% 1. What are the absolute best terms the bank can offer X.50%-10. 10. none of the above. D. Use the following information to calculate the quality spread differential (QSD): A. D.50% 2.23.000. 10.Chapter 14 #23 Topic: Basic Interest Rate Swap 24.45% against LIBOR flat.45%-10.

000. D.80%.000. What is the value of this swap to the swap bank? A.Chapter 14 #25 Topic: Currency Swaps 26. Their external borrowing opportunities are shown below: A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10. Y will pay the swap bank interest payments on £5. D The swap bank will earn 20 basis points per year in dollars but has exchange rate risk: pound. company Y wants to borrow £5.000. in exchange the swap bank will pay to company X interest payments on £5.000 with the coupon rate of 9. interest rate swap markets assist in tailoring financing to the type desired by a particular borrower. C The swap bank will earn 10 basis points per year but has exchange rate risk: pound-denominated . B.000.80% and the swap bank will pay Y annual payments on $10.000.000 with the coupon rate of 12%. Swaps are said to offer market completeness AThis means that all types of debt instruments are not regularly available for all borrowers. Thus .Chapter 14 #26 Topic: Currency Swaps . Eun .000. In that the swap market offers price discovery to the market. B The swap bank will earn 10 basis points per year but has exchange rate risk: dollar-denominated . The swap bank will earn 10 basis points per year.25. Because you can trade across both currencies and fixed and floating market segments.000 at a fixed rate of 10.5%. Company X wants to borrow $10. The exchange rate is $2 = £1 and is not expected to change over the next 5 years.000 at a fixed rate of 12. income and dollar-denominated costs and default risk.000 for 5 years.000 for 5 years. C. denominated income and dollar-denominated costs and default risk. income and pound-denominated costs and default risk. the only risk is default risk. None of the above Eun .

000 for one year and B wants to borrow $2.000. B is an Italian firm with AAA credit. Yes. Consider the dollar.$9%) = $2% + $1% = $3% B. rate is $2.27. The spot exchange rate is $2. company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange .€6% × $2.-based MNC with AAA credit.00 D No.00 = €1. A will be better off by €1% on €1m. company A borrows at 6% in euro but company B borrows at 8% in dollars C. Firm A wants to borrow €1.($8% .00 . A is a U.00 = €1.00 and the one-year forward rate is given by IRP as: Suppose they agree to the swap shown at right.000 for one year.Chapter 14 #27 Topic: Currency Swaps . Yes.000.and euro-based borrowing opportunities of companies A and B. B by 1% on $2m and $2. Is this mutually beneficial swap equally fair to both parties? A.00/€1. No. QSD = [€7% .00—A is twice as better off as B Eun .00 = €1.S.

bank.and euro-based borrowing opportunities of companies A and B. There is no mutually beneficial swap at these prices. bank. Pricing an interest-only single currency swap after inception involves A.9%) = 1% . QSD = 0 B.($8% . QSD = 2% = (7% . B.000 for one year and B wants to borrow $2. $ at bid and € at ask.000 for one year. B is an Italian firm with AAA credit. a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR: The firms external borrowing opportunities are: AFirm A does 2 swaps with the swap bank.€6%] × $2.00/€1. A is a U. currency and pay in the other currency. QSD = [€7% . converted to a common currency. The spot exchange rate is $2. B is an Italian firm with AAA credit.S. sending a market order to a swap dealer.08)/€1.-based MNC with AAA credit. $ at bid and € at ask. none of the above Eun .00 × (1.(8% . $ at ask and € at bid. Consider the dollar. The spot exchange rate is $2.€6%] .$9%) = $2% + $1% = $3% D. D.00 = €1.0377/€1.000 for one year. C finding the sum of the present values of the payments streams that each party will receive in one .-based MNC with AAA credit.$9%) × €1.00 = €1.00/$2.00 × (1.(-1%) C. B. finding the difference between the present values of the payments streams the party will receive and pay. QSD = [€7% .00.00 = €1½% Eun .000.($8% .000. Firm A wants to borrow €1.00 and the one-year forward rate is given by IRP as $2.000 for one year and B wants to borrow $2. Is there a mutually beneficial swap? A.00 .6%) .28. Firm B does 2 swaps with the swap . Firm A wants to borrow €1.06) = $2. Firms A and B would each save 90bp and the swap bank would earn 20bp. Yes. Yes. Yes. $ at ask and € at bid. None of the above Eun . Firms A and B would each save 90bp and the swap bank would earn 20bp.Chapter 14 #29 Topic: Currency Swaps 30. No. A is a U. CFirm A does 2 swaps with the swap bank. D. Firm B does 2 swaps with the swap .Chapter 14 #30 Topic: Currency Swaps .000.000.S.Chapter 14 #28 Topic: Currency Swaps 29.

000.000.000. The exchange rate is $2 = £1 and is not expected to change over the next 5 years.000 at £10.000 at $10%.000. B.80%.Chapter 14 #31 Topic: Currency Swaps . They should borrow $10. CThey should borrow £5. Y will pay the swap bank interest payments on £5. company Y wants to borrow £5.000 at a fixed rate of 10.000 fixed for 5 years.000 in five years.000 floating for 5 years. translate pounds to dollars . in exchange the swap bank will pay to company X interest payments on £5. Company X wants to borrow $10.000 at a fixed rate of 12. If company X takes on the swap. They should borrow £5.000 with the coupon rate of 12%. None of the above Eun .80% and the swap bank will pay Y annual payments on $10.000 at 10.000. enter long position in a forward contract to buy £5. at the spot rate. what external actions should they engage in? A.000.000.50% interest-only for five years.5%.31.000. translate pounds to dollars at the spot rate. Their external borrowing opportunities are: A swap bank proposes the following interest-only swap: Company X will pay the swap bank annual payments on $10. D.000.50% interest-only for five years.000 at an interest rate of $9.000.

B = £13%. B = £12%. Pricing a currency swap after inception involves Afinding the difference between the present values of the payments streams the party will receive in . B = $12%.000 floating for 5 years. B. none of the above Eun . A = £10. Their external borrowing opportunities are: A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. sending a market order to a swap dealer. In order for X and Y to be interested.Chapter 14 #32 Topic: Currency Swaps 33.32. Eun . B. company Y wants to borrow £5. one currency and pay in the other currency.000. converted to a common currency. D. C. A = $10%.000 fixed for 5 years.50%. they can face no exchange rate risk What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y? A.000. The exchange rate is $2 = £1 and is not expected to change over the next 5 years. converted to a common currency. D.Chapter 14 #33 Topic: Currency Swaps . C finding the sum of the present values of the payments streams that each party will receive in one .50%. A = $10. B = £13%. currency and pay in the other currency. A = $12%. Company X wants to borrow $10.

000 floating for 1 year. B. company Y wants to borrow £5.Chapter 14 #35 Topic: Currency Swaps 36. A = £7%. company X A.06) = $2. B = £6%. both a and c Eun .000.08)/£1. In a currency swap A. A = $8%. both a and b D. Company X wants to borrow $10.00 × (1.Chapter 14 #36 Topic: Currency Swaps .00 × (1. C. Eun . it may be the case that firms have a comparative advantage in borrowing in their domestic markets. A = $7%. D. B. they can face no exchange rate risk What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y? A. is probably British. B = £8%. In the problem just previous.000. D. is probably American. none of the above Eun . it may be the case that two counterparties have equivalent credit ratings.0377/£1. B = £7%. Their external borrowing opportunities are: A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. C.000 fixed for 1 year. In order for X and Y to be interested. A = $8%. has a comparative advantage in borrowing pounds.Chapter 14 #34 Topic: Currency Swaps 35. C. B.34. B = $9%. The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as $2.

B. A and B agree to split the QSD. Company A and company B both want to borrow £1. B.788.37. C.114. D.000. there is no such thing as an amortizing interest-only swap. Floating for floating currency swaps A.000 to A B pays £69. offer the swap bank a built-in hedge. D. do not exist. A and B agree to split the QSD.000 for three years. C. none of the above Eun . B pays £402. D. Compute the payments due in the second year on a three-year AMORTIZING swap from company B to company A.80 to A B pays £100.788.52 to A None of the above Eun . the reference rates are different for the different currencies: e. B.52 to A None of the above Eun . C. A.Chapter 14 #38 Topic: Variations of Basic Interest Rate and Currency Swaps 39. dollar LIBOR versus euro LIBOR. B pays £402. but the level of interest and principal changes as the loans amortize.000 to A B pays £69.Chapter 14 #39 Topic: Variations of Basic Interest Rate and Currency Swaps 40. B. A.000.g. A wants to borrow floating and B wants to borrow fixed. C. Compute the payments due in the FIRST year on a three-year AMORTIZING swap from company B to company A. the debt service exchanges are the same each year. Company A and company B both want to borrow £1. A wants to borrow floating and B wants to borrow fixed.000 for three years. D. When an interest-only swap is established on an amortizing basis A.114. the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized.Chapter 14 #40 Topic: Variations of Basic Interest Rate and Currency Swaps .80 to A B pays £100.Chapter 14 #37 Topic: Variations of Basic Interest Rate and Currency Swaps 38. none of the above Eun .

(iii).sovereign risk A. In an interest-only currency swap Athe counterparties must raise the actual notational principal in their home markets.700. (i). calculate the price of the swap. B.000 D. none of the above Eun .political risk (v) . Floating for floating currency swaps A.Chapter 14 #44 Topic: Variations of Basic Interest Rate and Currency Swaps 45. B. and (iv) D. (i). and (v) B. SFr2.e. C. Which combination of the following represent the risks that a swap dealer confronts: (i) . XYZ Corporation enters into a 6-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed-rate of 9 percent annually on a notional amount of SFr10. then exchange it . dollar LIBOR versus euro LIBOR.interest rate risk (ii) . (iv). A. the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized.½ percent. As of the third reset date (i. for the foreign currency they desire. incorporate an amortization feature in which periodically the amortized portions of the notational principals are re-exchanged. (iii).000 and receive LIBOR . SFr900. B.000. (ii).41.exchange rate risk (iv) . Eun . both a and b D. disappear when controlling for volatility. The must also hedge with forward contracts on the currency. SFr248. and (iv) C.Chapter 14 #45 Topic: Variations of Basic Interest Rate and Currency Swaps 46.300.Chapter 14 #42 Topic: Variations of Basic Interest Rate and Currency Swaps 43. the reference rates can be the same but have different frequencies. (iv). the counterparties periodically exchange the amortized portions of the notational principals. (iii). can be explained by the set of international parity relationships. can be explained by the quality spread differential. assuming that the fixed-rate at which XYZ can borrow has increased to 10%. can be explained by the credit risk differentials.Chapter 14 #43 Topic: Variations of Basic Interest Rate and Currency Swaps 44. (i).Chapter 14 #41 Topic: Variations of Basic Interest Rate and Currency Swaps 42. C. both a and b D. SFr7.g. (ii). (iii). D. none of the above Eun .basis risk (iii) .000 C. none of the above Eun . the reference rates are different for the different currencies: e. C. mid-way through the 6 year agreement). both a and b D.Chapter 14 #46 Topic: Risks of Interest Rate and Currency Swaps . Nominal differences in currency swaps A.000 Eun . Amortizing currency swaps A.685 B. and (v) Eun . C. B.

This is A. D. A major risk faced by a swap dealer is credit risk. the probability that either counterparty defaults in a currency swap. the probability that a sovereign counterparty will default. C. A. none of the above Eun . and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk. D. the probability floating rates and exchange rates will NOT move together. A major risk faced by a swap dealer is mismatch risk. none of the above Eun . and "sovereign risk" refers to a situation . But only to the extent that a foreign counterparty will NOT default in a currency swap. This is A. D. But only if the bid-ask spreads are wide. B.Chapter 14 #50 Topic: Risks of Interest Rate and Currency Swaps 51. involved in a swap. B. B.Chapter 14 #51 Topic: Risks of Interest Rate and Currency Swaps 52. in which the floating rates of the two counterparties are not pegged to the same index.47. A major risk faced by a swap dealer is exchange rate risk. A major that can be eliminated through a swap is exchange rate risk. A major risk faced by a swap dealer is sovereign risk. C. C. none of the above Eun . D.Chapter 14 #47 Topic: Risks of Interest Rate and Currency Swaps 48. But swaps can be less efficient in this than just trading at the expected spot exchange rates each year. the probability that both counterparties default. C. C. opposing counterparty the other side of an interest rate swap entered into with a counterparty. B"basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged . This is A. None of the above Eun .Chapter 14 #48 Topic: Risks of Interest Rate and Currency Swaps 49. D"basis risk" refers to the risk of fluctuating exchange rates. the probability that a foreign counterparty will default in a currency swap. the difficulty in finding a second counterparty for a swap that the bank has agreed to take with another party. the probability floating rates will move against the dealer. the probability that both counterparties default. B. C"basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an . D.Chapter 14 #49 Topic: Risks of Interest Rate and Currency Swaps 50. the probability that a country will impose exchange restrictions on a currency involved in an existing swap. the probability governments will intervene to support an exchange rate. the probability exchange rates will move against the dealer. the probability that a counterparty will default." They are defined as A"basis risk" refers to the probability that a country will impose exchange restrictions on a currency . Eun . and "sovereign risk" refers to a situation in which the floating rates of the two counterparties are not pegged to the same index.Chapter 14 #52 Topic: Risks of Interest Rate and Currency Swaps . to the same index and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a currency involved in a swap. B. This is A. none of the above Eun .

BA borrows $10 million externally for 5 years at LIBOR.Chapter 14 #53 Topic: Is the Swap Market Efficient 54. agrees to swap LIBOR to firm B for . Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk. None of the above Eun .Chapter 14 #54 Topic: Miscellaneous Swap Problems 55.S.00.00 = $2. pay 11% in pounds to Firm B.Chapter 14 #57 Topic: Miscellaneous Swap Problems . Firm A is a U. Both corporations wish to borrow $10 million for 5 years. There is no mutually beneficial swap that has neither party facing exchange rate risk. pay 11% in pounds to Firm B. Firm A can borrow at 8% fixed or can borrow floating at LIBOR. 8 ½ % fixed for 5 years on a notational principal of $5 million. none of the above Eun . pay 11% in pounds to Firm B. premiums on different types of debt instruments.-based multinational. C. The swap bank stands willing to accept either side of a swap. When a swap bank serves as a dealer: A. Firm B is somewhat less creditworthy and can borrow at 10% fixed or can borrow floating at LIBOR + 1%. Consider a plain vanilla interest rate swap. C. The swap bank matches counterparties but does not assume any risk of the swap. for 5 years on a notational principal of $5 million. In an efficient market without barriers to capital flows.Chapter 14 #56 Topic: Miscellaneous Swap Problems 57. who in turn borrows 2 . D Firm A should borrow $4 million in dollars. Since the QSD = 0 there is no mutually beneficial swap. When a swap bank serves as a broker: A. B borrows $10 million externally at 10%. The swap bank receives a commission for matching buyers and sellers. The swap bank receives a commission for matching buyers and sellers. Firm B wants to finance a $4 million expansion in the U. Eun .S. DA borrows $10 million externally at 8% fixed for 5 years. Eun wants to borrow floating and Resnick prefers to borrow fixed. agrees to swap LIBOR to B for 8½% fixed . B. Which of the following swaps is mutually beneficial to each party and meets their financing needs? AFirm A borrows $10 million externally for 5 years at LIBOR. Eun . Firm A wants to finance a £2 million expansion in Great Britain. B borrows $10 million externally at LIBOR + 1%.K. B Firm A should borrow $4 million in dollars. The spot exchange rate is £1.53. The swap bank matches counterparties but does not assume any risk of the swap. million pounds and pays 10% in dollars to A. C. million pounds and pays 8% in dollars to A. D. B. who in turn borrows 4 . C Firm A should borrow $2 million in dollars. the cost-savings argument of the QSD is difficult to accept. for 5 years on a notational principal of $5 million. who in turn borrows 2 .based multinational. Consider fixed-for-fixed currency swap. agrees to pay 8½% to B for LIBOR fixed . B borrows $10 million externally at 10%. Firm A can borrow dollars at $10% and pounds sterling at 12%.it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on different maturities of forward contracts. million pounds and pays 8% in dollars to A. D. Firm B can borrow dollars at 9% and pounds sterling at 11%. The swap bank stands willing to accept either side of a swap. None of the above Eun . B. because A it implies that an arbitrage opportunity exists because of some mispricing of the default risk .Chapter 14 #55 Topic: Miscellaneous Swap Problems 56. Firm B is a U. C. A.

Jones. pay £11¾% in pounds to the swap bank .090. receive $10% from the swap bank on a notational principal of $4 million. pays $8½% to the swap bank on a notational principal of $4 million and receives £10% in pounds from the swap bank on a notational principal of £2 million. LIBOR is at 5 percent. B. which of the following swaps is mutually beneficial to each party and meets their financing needs? ADow should borrow $4 million in dollars externally at $10%. receive $8% from the swap bank on a notational principal of $4 million. Jones wants to finance a $4 million expansion in the U. borrows £2 million pounds externally at £10%. LIBOR + ½ percent B.090. With regard to a swap bank acting as a dealer in swap transactions. interest rate risk refers to A. There is no swap that is possible. Dow can borrow dollars at $10% and pounds sterling at 12%. C the risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to . borrows £2 million pounds externally at £10%.S.090. borrows £2 million pounds externally at £10%.00 = $2.Chapter 14 #59 Topic: Miscellaneous Swap Problems 60. pays $10% to the swap bank on a notational principal of $4 million and receives £11% in pounds from the swap bank on a notational principal of £2 million. Eun . Jones can borrow dollars at 9% and pounds sterling at 10%.00. LIBOR . determine the price of the swap from the bank's point of view assuming that the fixed-rate side of the swap has increased to 11 percent. Dow wants to finance a £2 million expansion in Great Britain. A.000. lay off a swap it undertakes with one counterparty with an opposing transaction. $90. Eun .-based multinational. LIBOR C. A. BDow should borrow $4 million in dollars externally at $10%.K. the risk that a counterparty will default. on a notational principal of £2 million. Jones. $909. bank on a notational principal of £2 million.58. Jones. Eun .91 gain.09 loss. D.09 gain. $90. but the other counterparties are not. The Jones Corporation is a U. receive $10% from the swap bank on a notational principal of $4million. the risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index. CDow should borrow $4 million in dollars externally at $10%.½ percent D.Chapter 14 #60 Topic: Miscellaneous Swap Problems 61. Assuming that the swap bank is willing to take on exchange rate risk. pay £11½ % in pounds to the swap . D.-based multinational. None of the above Eun . counterparty on the other side of an interest rate swap entered into with the first counterparty. Consider a fixed for fixed currency swap. The Dow Corporation is a U. pay £11% in pounds to the swap bank .Chapter 14 #61 Topic: Miscellaneous Swap Problems . C. D. No loss or no gain since maturity has not arrived. The spot exchange rate is £1. Consider bank that has entered into a five-year swap on a notational balance of $10. As of the fourth reset date.000 with a corporate customer who has agreed to pay a fixed payment of 10 percent in exchange for LIBOR. pays $8¾% to the swap bank on a notational principal of $4 million and receives £10% in pounds from the swap bank on a notational principal of £2 million. on a notational principal of £2 million.S. Find the all-in-cost of a swap to a party that has agreed to borrow $5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of $5 million in exchange for fixed rate payments of 6 percent. Bthe risk that interest rates changing unfavorably before the swap bank can lay off to an opposing .Chapter 14 #58 Topic: Miscellaneous Swap Problems 59.

4% C.Chapter 14 #65 Topic: Miscellaneous Swap Problems . Bthe risk that interest rates changing unfavorably before the sap bank can lay off to an opposing . C the risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to . One risk that you face by using the swap that you do not face by borrowing euros directly is A. and enter into a combined interest rate and currency swap with a swap bank. B. You are the debt manager for a U. exchange rate risk. 5% B.000 for five years. mismatch risk refers to A.Chapter 14 #62 Topic: Miscellaneous Swap Problems 63. what you be willing to pay in euro against receiving USD LIBOR? A. what you be willing to pay in euro against receiving USD LIBOR? A.Chapter 14 #64 Topic: Miscellaneous Swap Problems 65. lay off a swap it undertakes with one counterparty with an opposing transaction.000. Develop the 3-year bid price of a dollar swap quoted against flat USD LIBOR. the risk that it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed take. 3% D. the risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index. credit risk. sovereign risk. C. Eun . Eun . 3% D. interest rate risk. Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.Chapter 14 #63 Topic: Miscellaneous Swap Problems 64. 2% Eun .S. You can either borrow the €100.-based multinational. 2% Eun . With regard to a swap bank acting as a dealer in swap transactions. You need to borrow €100. D. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR.000. 5% B. Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown. In other words.62. D. 4% C. In other words. counterparty on the other side of an interest rate swap entered into with the first counterparty.000 directly in Germany or borrow dollars in the U.S.

None of the above Eun . In other words.Chapter 14 #66 Topic: Miscellaneous Swap Problems .00.50 per €1. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. 5% D. what you be willing to pay in euro against receiving USD LIBOR? A.66. Suppose that you are a swap bank and you notice that interest rates on coupon bonds are as shown. The size of the swap is €40 million versus $60 million. 7% B. The current spot exchange rate is $1. 6% C.