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1.
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.
4.
5.
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 8.508.60 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 8.508.60 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 8.508.60 percent in dollars and
6.606.80 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:
19. 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:
20. 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 is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%10.45% against LIBOR flat.
21. 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:
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.
B.
C.
D.
Option A
Option B
Option C
Option D
22. Suppose ABC Investment Banker Ltd., is quoting swap rates as follows: 7.50 - 7.85 annually against sixmonth dollar LIBOR for dollars, and 11.00 - 11.30 percent annually against six-month dollar LIBOR for
British pound sterling. ABC would enter into a $/ currency swap in which:
A. it would pay annual fixed-rate dollar payments of 7.5% in return for receiving annual fixed-rate
payments at 11.3%
B. it will receive annual fixed-rate dollar payments at 7.85% against paying annual fixed-rate payments
at 11%
C. a and b
D. none of the above
23. Use the following information to calculate the quality spread differential (QSD):
A.
B.
C.
D.
0.50%
1.00%
1.50%
2.00%
24. 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 is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%10.45% against LIBOR flat.
Assume company Y has agreed, but company X will only agree to the swap if the bank offers better
terms.
What are the absolute best terms the bank can offer X, given that it already booked Y?
A.
B.
C.
D.
25. Company X wants to borrow $10,000,000 for 5 years; company Y wants to borrow 5,000,000 for 5
years. The exchange rate is $2 = 1 and is not expected to change over the next 5 years. Their external
borrowing opportunities are shown below:
27. Consider the dollar- and euro-based borrowing opportunities of companies A and B.
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow
1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00
= 1.00 and the one-year forward rate is given by IRP as:
Suppose they
agree to the swap shown at right. Is this mutually beneficial swap equally fair to both parties?
AFirm A does 2 swaps with the swap bank, $ at bid and at ask. Firm B does 2 swaps with the swap
.
bank, $ at ask and at bid. Firms A and B would each save 90bp and the swap bank would earn 20bp.
B. There is no mutually beneficial swap at these prices.
CFirm A does 2 swaps with the swap bank, $ at ask and at bid. Firm B does 2 swaps with the swap
.
bank, $ at bid and at ask. Firms A and B would each save 90bp and the swap bank would earn 20bp.
D. None of the above
29. Consider the dollar- and euro-based borrowing opportunities of companies A and B.
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow
1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00
= 1.00 and the one-year forward rate is given by IRP as $2.00 (1.08)/1.00 (1.06) = $2.0377/1.
Is there a mutually beneficial swap?
A. No, QSD = 0
B. Yes, QSD = 2% = (7% - 6%) - (8% - 9%) = 1% - (-1%)
C. Yes, QSD = [7% - 6%] $2.00/1.00 - ($8% - $9%) = $2% + $1% = $3%
D. Yes, QSD = [7% - 6%] - ($8% - $9%) 1.00/$2.00 = 1%
30. Pricing an interest-only single currency swap after inception involves
A. sending a market order to a swap dealer.
B. finding the difference between the present values of the payments streams the party will receive and
pay.
C finding the sum of the present values of the payments streams that each party will receive in one
. currency and pay in the other currency, converted to a common currency.
D. none of the above
31. Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow 5,000,000
fixed for 5 years. The exchange rate is $2 = 1 and is not expected to change over the next 5 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 $10,000,000 at an interest rate of $9.80%; in exchange the swap bank will pay to company
X interest payments on 5,000,000 at a fixed rate of 10.5%. Y will pay the swap bank interest payments
on 5,000,000 at a fixed rate of 12.80% and the swap bank will pay Y annual payments on $10,000,000
with the coupon rate of 12%.
If company X takes on the swap, what external actions should they engage in?
A. They should borrow $10,000,000 at $10%.
B. They should borrow 5,000,000 at 10.50% interest-only for five years; translate pounds to dollars at
the spot rate.
CThey should borrow 5,000,000 at 10.50% interest-only for five years; translate pounds to dollars at
. the spot rate; enter long position in a forward contract to buy 5,000,000 in five years.
D. None of the above
32. Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow 5,000,000
fixed for 5 years. The exchange rate is $2 = 1 and is not expected to change over the next 5 years. Their
external borrowing opportunities are:
A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. 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. A = $10.50%; B = 12%.
B. A = $10%; B = 13%.
C. A = $12%; B = 13%.
D. A = 10.50%; B = $12%.
A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. 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. A = 7%; B = $9%.
B. A = $8%; B = 6%.
C. A = $7%; B = 7%.
D. A = $8%; B = 8%.
35. In the problem just previous, company X
A. is probably British.
B. is probably American.
C. has a comparative advantage in borrowing pounds.
D. both a and c
36. In a currency swap
A. it may be the case that two counterparties have equivalent credit ratings.
B. it may be the case that firms have a comparative advantage in borrowing in their domestic markets.
C. both a and b
D. none of the above
37. Compute the payments due in the second year on a three-year AMORTIZING swap from company B
to company A. Company A and company B both want to borrow 1,000,000 for three years. A wants to
borrow floating and B wants to borrow fixed. A and B agree to split the QSD.
A.
B.
C.
D.
B pays 402,114.80 to A
B pays 100,000 to A
B pays 69,788.52 to A
None of the above
A.
B.
C.
D.
B pays 402,114.80 to A
B pays 100,000 to A
B pays 69,788.52 to A
None of the above
56. Consider a plain vanilla interest rate swap. Firm A can borrow at 8% fixed or can borrow floating at
LIBOR. Firm B is somewhat less creditworthy and can borrow at 10% fixed or can borrow floating at
LIBOR + 1%. Eun wants to borrow floating and Resnick prefers to borrow fixed. Both corporations wish
to borrow $10 million for 5 years. 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; agrees to swap LIBOR to firm B for 8
. % fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at 10%.
BA borrows $10 million externally for 5 years at LIBOR; agrees to pay 8% to B for LIBOR fixed for 5
. years on a notational principal of $5 million; B borrows $10 million externally at 10%.
C. Since the QSD = 0 there is no mutually beneficial swap.
DA borrows $10 million externally at 8% fixed for 5 years; agrees to swap LIBOR to B for 8% fixed
. for 5 years on a notational principal of $5 million; B borrows $10 million externally at LIBOR + 1%.
57. Consider fixed-for-fixed currency swap. Firm A is a U.S.-based multinational. Firm B is a U.K.-based
multinational. Firm A wants to finance a 2 million expansion in Great Britain. Firm B wants to finance
a $4 million expansion in the U.S. The spot exchange rate is 1.00 = $2.00. Firm A can borrow dollars at
$10% and pounds sterling at 12%. Firm B can borrow dollars at 9% and pounds sterling at 11%. Which
of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party
should face exchange rate risk.
A. There is no mutually beneficial swap that has neither party facing exchange rate risk.
B Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2
. million pounds and pays 8% in dollars to A.
C Firm A should borrow $2 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 4
. million pounds and pays 8% in dollars to A.
D Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2
. million pounds and pays 10% in dollars to A.
58. Consider bank that has entered into a five-year swap on a notational balance of $10,000,000 with a
corporate customer who has agreed to pay a fixed payment of 10 percent in exchange for LIBOR. As
of the fourth reset date, 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. LIBOR is at 5 percent.
A. $909,090.91 gain.
B. $90,090.09 loss.
C. No loss or no gain since maturity has not arrived.
D. $90,090.09 gain.
59. 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 + percent on a notational principal of $5 million in exchange for fixed rate payments of 6
percent.
A. LIBOR + percent
B. LIBOR
C. LIBOR - percent
D. None of the above
60. Consider a fixed for fixed currency swap. The Dow Corporation is a U.S.-based multinational. The Jones
Corporation is a U.K.-based multinational. Dow wants to finance a 2 million expansion in Great Britain.
Jones wants to finance a $4 million expansion in the U.S. The spot exchange rate is 1.00 = $2.00. Dow
can borrow dollars at $10% and pounds sterling at 12%. Jones can borrow dollars at 9% and pounds
sterling at 10%. Assuming that the swap bank is willing to take on exchange rate risk, but the other
counterparties are not, 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%; pay 11% in pounds to the swap bank
. on a notational principal of 2 million; receive $10% from the swap bank on a notational principal of
$4million. Jones, borrows 2 million pounds externally at 10%; pays $8% 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.
BDow should borrow $4 million in dollars externally at $10%; pay 11 % in pounds to the swap bank
. on a notational principal of 2 million; receive $10% from the swap bank on a notational principal of
$4 million. Jones, borrows 2 million pounds externally at 10%; pays $8% 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.
CDow should borrow $4 million in dollars externally at $10%; pay 11% in pounds to the swap bank
. on a notational principal of 2 million; receive $8% from the swap bank on a notational principal of
$4 million. Jones, borrows 2 million pounds externally at 10%; 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.
D. There is no swap that is possible.
61. With regard to a swap bank acting as a dealer in swap transactions, interest rate risk refers to
A. the risk that arises from the situation in which the floating-rates of the two counterparties are not
pegged to the same index.
Bthe risk that interest rates changing unfavorably before the swap bank can lay off to an opposing
. counterparty on the other side of an interest rate swap entered into with the first counterparty.
Cthe risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay
. off a swap it undertakes with one counterparty with an opposing transaction.
D. the risk that a counterparty will default.
62. With regard to a swap bank acting as a dealer in swap transactions, mismatch risk refers to
A. the risk that arises from the situation in which the floating-rates of the two counterparties are not
pegged to the same index.
Bthe risk that interest rates changing unfavorably before the sap bank can lay off to an opposing
. counterparty on the other side of an interest rate swap entered into with the first counterparty.
Cthe risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay
. off a swap it undertakes with one counterparty with an opposing transaction.
D. the risk that it may be difficult or impossible to find an exact opposite match for a swap the bank has
agreed take.
63. You are the debt manager for a U.S.-based multinational. You need to borrow 100,000,000 for five
years. You can either borrow the 100,000,000 directly in Germany or borrow dollars in the U.S. and
enter into a combined interest rate and currency swap with a swap bank. One risk that you face by using
the swap that you do not face by borrowing euros directly is
A. exchange rate risk.
B. sovereign risk.
C. credit risk.
D. interest rate risk.
64. Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.
Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR.
In other words, what you be willing to pay in euro against receiving USD LIBOR?
A. 5%
B. 4%
C. 3%
D. 2%
65. Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.
Develop the 3-year bid price of a dollar swap quoted against flat USD LIBOR.
In other words, what you be willing to pay in euro against receiving USD LIBOR?
A. 5%
B. 4%
C. 3%
D. 2%
66. Suppose that you are a swap bank and you notice that interest rates on coupon bonds are as shown.
Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. The current spot exchange
rate is $1.50 per 1.00. The size of the swap is 40 million versus $60 million.
In other words, what you be willing to pay in euro against receiving USD LIBOR?
A. 7%
B. 6%
C. 5%
D. None of the above
67. Come up with a swap (exchange of interest and principal) for parties A and B who have the following
borrowing opportunities.
The current exchange rate is $1.60 = 1.00. Company "A" is in Milan, Italy and wishes to borrow
$1,000,000 at a floating rate for 5 years and company "B" is a U.S. firm that wants to borrow 625,000
for 5 years at a fixed rate of interest. You are a swap dealer. Quote A and B a swap that makes money for
all parties and eliminates exchange rate risk for both A and B.
68. Suppose that the swap that you proposed in question 2 is now 4 years old (i.e. there is exactly one year to
go on the swap). The fourth payment has already been made. If the spot exchange rate prevailing in year
4 is $1.8778 = 1 and the 1-year forward exchange rate prevailing in year 4 is $1.95 = 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:
69. Come up with a swap (principal + interest) for two parties A and B who have the following borrowing
opportunities.
The current exchange rate is $1.60 = 1.00. Company "A" wishes to borrow $1,000,000 for 5 years
and "B" wants to borrow 625,000 for 5 years. You are a swap dealer. Quote A and B a swap that
makes money for all parties and eliminates exchange rate risk for both A and B. Firms A and B are more
concerned with what currency that they borrow in than whether the debt is fixed or floating.
70. Suppose that the swap that you proposed in question 2 is now 4 years old (i.e. there is exactly one year
to go on the swap). If the spot exchange rate prevailing in year 4 is $1.8778 = 1 and the 1-year forward
exchange rate prevailing in year 4 is $1.95 = 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. The current exchange rate is $1.50/. Firm A is a U.S. MNC
and wants to borrow 40 million for 2 years. Firm B is a French MNC and wants to borrow $60 million
for 2 years. Their borrowing opportunities are as shown; both firms have AAA credit ratings.
71. What are the IRP 1-year and 2-year forward exchange rates?
72. 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.
74. Explain how this opportunity affects which swap firm A will be willing to participate in.
75. 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.
77. Explain how this opportunity affects which swap firm B will be willing to participate in.
78. Devise a direct swap for A and B that has no swap bank. Show their external borrowing. Answer the
problem in the template provided.
79. 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.
80. Show how your proposed swap would work for firm A. (e.g. if you were acting as an agent for the swap
bank, try to "sell" firm A on your swap)
Consider the situation of firm A and firm B. The current exchange rate is $2.00/ Firm A is a U.S. MNC
and wants to borrow 30 million for 2 years. Firm B is a British MNC and wants to borrow $60 million
for 2 years. Their borrowing opportunities are as shown, both firms have AAA credit ratings.
81. What are the IRP 1-year and 2-year forward exchange rates?
82. 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.
84. Explain how this opportunity affects which swap firm A will be willing to participate in.
85. 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.
87. Explain how this opportunity affects which swap firm B will be willing to participate in.
88. Devise a direct swap for A and B that has no swap bank. Show their external borrowing. Answer the
problem in the template provided.
89. 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.
90. Show how your proposed swap would work for firm A. (e.g. if you were acting as an agent for the swap
bank, try to "sell" firm A on your swap)
91. Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at a FIXED
rate. B wants to finance a $100,000,000 project at a FLOATING rate. Both firms want the same maturity,
5 years.
Construct a mutually beneficial INTEREST ONLY swap that makes money for A, B, and the swap bank
IN EQUAL MEASURE.
92. 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.)
93. An interest-only currency swap has a remaining life of 18 months. It involves exchanging interest at
14% on 20 million for interest at 10% on $14 million once a year. The term structure of interest rates
is currently flat in both the U.S. and in the U.K. If the swap were negotiated today the interest rates
exchanged would be $8% and 11%. All rates were quoted with annual compounding. The current
exchange rate is $1.95 = 1. What is the value of the swap to the party paying dollars?
Consider the situation of firm A and firm B. The current exchange rate is $2.00/ Firm A is a U.S. MNC
and wants to borrow 30 million for 2 years. Firm B is a British MNC and wants to borrow $60 million
for 2 years. Their borrowing opportunities are as shown, both firms have AAA credit ratings.
94. Explain how firm A could use two of the swaps offered above to hedge its exchange rate risk.
95. Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk.
96. 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.
97. Explain how this opportunity affects which swap firm A will be willing to participate in.
98. 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. Explain how this opportunity affects which swap firm B will be willing to participate in.
100.Consider the situation of firm A and firm B. The current exchange rate is $2.00/ Firm A is a U.S. MNC
and wants to borrow 30 million for 2 years. Firm B is a British MNC and wants to borrow $60 million
for 2 years. Their borrowing opportunities are as shown, both firms have AAA credit ratings.
Devise a direct swap for A and B that has no swap bank. Show their external borrowing. Answer the
problem in the template provided.
14 Key
1.
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
Eun - Chapter 14 #2
Topic: Types of Swaps
3.
4.
5.
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
Eun - Chapter 14 #6
Topic: The Swap Bank
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.
Eun - Chapter 14 #7
Topic: The Swap Bank
8.
Suppose the quote for a five-year swap with semiannual payments is 8.508.60 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
six-month dollar LIBOR.
C. both a and b
D. none of the above
Eun - Chapter 14 #8
Topic: Swap Market Quotations
9.
Suppose the quote for a five-year swap with semiannual payments is 8.508.60 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
six-month 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
Eun - Chapter 14 #9
Topic: Swap Market Quotations
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
Eun - Chapter 14 #10
Topic: Swap Market Quotations
11.
Suppose the quote for a five-year swap with semiannual payments is 8.508.60 percent in dollars and
6.606.80 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
Eun - Chapter 14 #11
Topic: Swap Market Quotations
12.
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
Eun - Chapter 14 #13
Topic: Interest Rate Swaps
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
Eun - Chapter 14 #14
Topic: Basic Interest Rate Swap
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
Eun - Chapter 14 #15
Topic: Basic Interest Rate Swap
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.
Eun - Chapter 14 #16
Topic: Basic Interest Rate Swap
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.
Eun - Chapter 14 #17
Topic: Basic Interest Rate Swap
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:
19.
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:
20.
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 is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%10.45% against LIBOR flat.
21.
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:
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.
B.
C.
D.
Option A
Option B
Option C
Option D
Eun - Chapter 14 #21
Topic: Basic Interest Rate Swap
22.
Suppose ABC Investment Banker Ltd., is quoting swap rates as follows: 7.50 - 7.85 annually against
six-month dollar LIBOR for dollars, and 11.00 - 11.30 percent annually against six-month dollar
LIBOR for British pound sterling. ABC would enter into a $/ currency swap in which:
A. it would pay annual fixed-rate dollar payments of 7.5% in return for receiving annual fixed-rate
payments at 11.3%
B. it will receive annual fixed-rate dollar payments at 7.85% against paying annual fixed-rate
payments at 11%
C. a and b
D. none of the above
Eun - Chapter 14 #22
Topic: Basic Interest Rate Swap
23.
Use the following information to calculate the quality spread differential (QSD):
A.
B.
C.
D.
0.50%
1.00%
1.50%
2.00%
Eun - Chapter 14 #23
Topic: Basic Interest Rate Swap
24.
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 is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%10.45% against LIBOR flat.
Assume company Y has agreed, but company X will only agree to the swap if the bank offers better
terms.
What are the absolute best terms the bank can offer X, given that it already booked Y?
A.
B.
C.
D.
25.
Company X wants to borrow $10,000,000 for 5 years; company Y wants to borrow 5,000,000 for 5
years. The exchange rate is $2 = 1 and is not expected to change over the next 5 years. Their external
borrowing opportunities are shown below:
26.
27.
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to
borrow 1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange
rate is $2.00 = 1.00 and the one-year forward rate is given by IRP as:
Suppose they agree to the swap shown at right. Is this mutually beneficial swap equally fair to both
parties?
28.
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to
borrow 1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange
rate is $2.00 = 1.00, a swap bank makes the following quotes for 1-year swaps and AAA-rated firms
against USD LIBOR:
AFirm A does 2 swaps with the swap bank, $ at bid and at ask. Firm B does 2 swaps with the swap
.
bank, $ at ask and at bid. Firms A and B would each save 90bp and the swap bank would earn
20bp.
B. There is no mutually beneficial swap at these prices.
CFirm A does 2 swaps with the swap bank, $ at ask and at bid. Firm B does 2 swaps with the swap
.
bank, $ at bid and at ask. Firms A and B would each save 90bp and the swap bank would earn
20bp.
D. None of the above
Eun - Chapter 14 #28
Topic: Currency Swaps
29.
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to
borrow 1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange
rate is $2.00 = 1.00 and the one-year forward rate is given by IRP as $2.00 (1.08)/1.00 (1.06) =
$2.0377/1.
Is there a mutually beneficial swap?
A. No, QSD = 0
B. Yes, QSD = 2% = (7% - 6%) - (8% - 9%) = 1% - (-1%)
C. Yes, QSD = [7% - 6%] $2.00/1.00 - ($8% - $9%) = $2% + $1% = $3%
D. Yes, QSD = [7% - 6%] - ($8% - $9%) 1.00/$2.00 = 1%
Eun - Chapter 14 #29
Topic: Currency Swaps
30.
31.
Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow
5,000,000 fixed for 5 years. The exchange rate is $2 = 1 and is not expected to change over the next
5 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 $10,000,000 at an interest rate of $9.80%; in exchange the swap bank will pay to
company X interest payments on 5,000,000 at a fixed rate of 10.5%. Y will pay the swap bank
interest payments on 5,000,000 at a fixed rate of 12.80% and the swap bank will pay Y annual
payments on $10,000,000 with the coupon rate of 12%.
If company X takes on the swap, what external actions should they engage in?
A. They should borrow $10,000,000 at $10%.
B. They should borrow 5,000,000 at 10.50% interest-only for five years; translate pounds to dollars
at the spot rate.
CThey should borrow 5,000,000 at 10.50% interest-only for five years; translate pounds to dollars
. at the spot rate; enter long position in a forward contract to buy 5,000,000 in five years.
D. None of the above
Eun - Chapter 14 #31
Topic: Currency Swaps
32.
Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow
5,000,000 fixed for 5 years. The exchange rate is $2 = 1 and is not expected to change over the next
5 years. Their external borrowing opportunities are:
A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. 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. A = $10.50%; B = 12%.
B. A = $10%; B = 13%.
C. A = $12%; B = 13%.
D. A = 10.50%; B = $12%.
Eun - Chapter 14 #32
Topic: Currency Swaps
33.
34.
Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow 5,000,000
fixed for 1 year. The spot exchange rate is $2 = 1 and IRP calculates the one-year forward rate as
$2.00 (1.08)/1.00 (1.06) = $2.0377/1. Their external borrowing opportunities are:
A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. 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. A = 7%; B = $9%.
B. A = $8%; B = 6%.
C. A = $7%; B = 7%.
D. A = $8%; B = 8%.
35.
36.
In a currency swap
A. it may be the case that two counterparties have equivalent credit ratings.
B. it may be the case that firms have a comparative advantage in borrowing in their domestic markets.
C. both a and b
D. none of the above
Eun - Chapter 14 #36
Topic: Currency Swaps
37.
Compute the payments due in the second year on a three-year AMORTIZING swap from company B
to company A. Company A and company B both want to borrow 1,000,000 for three years. A wants
to borrow floating and B wants to borrow fixed. A and B agree to split the QSD.
A.
B.
C.
D.
B pays 402,114.80 to A
B pays 100,000 to A
B pays 69,788.52 to A
None of the above
Eun - Chapter 14 #37
Topic: Variations of Basic Interest Rate and Currency Swaps
38.
39.
40.
Compute the payments due in the FIRST year on a three-year AMORTIZING swap from company B
to company A. Company A and company B both want to borrow 1,000,000 for three years. A wants
to borrow floating and B wants to borrow fixed. A and B agree to split the QSD.
A.
B.
C.
D.
B pays 402,114.80 to A
B pays 100,000 to A
B pays 69,788.52 to A
None of the above
Eun - Chapter 14 #40
Topic: Variations of Basic Interest Rate and Currency Swaps
41.
42.
43.
44.
45.
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 SFr10,000,000 and
receive LIBOR - percent. As of the third reset date (i.e. mid-way through the 6 year agreement),
calculate the price of the swap, assuming that the fixed-rate at which XYZ can borrow has increased
to 10%.
A. SFr248,685
B. SFr900,000
C. SFr2,700,000
D. SFr7,300,000
Eun - Chapter 14 #45
Topic: Variations of Basic Interest Rate and Currency Swaps
46.
Which combination of the following represent the risks that a swap dealer confronts:
(i) - interest rate risk
(ii) - basis risk
(iii) - exchange rate risk
(iv) - political risk
(v) - sovereign risk
A. (i), (ii), (iii), and (v)
B. (i), (iii), and (iv)
C. (iii), (iv), and (iv)
D. (i), (ii), (iii), (iv), and (v)
Eun - Chapter 14 #46
Topic: Risks of Interest Rate and Currency Swaps
47.
48.
49.
50.
51.
Some of the risks that a swap dealer confronts are "basis risk" and "sovereign risk." They are defined
as
A"basis risk" refers to the probability that a country will impose exchange restrictions on a currency
. involved in a swap, and "sovereign risk" refers to a situation in which the floating rates of the two
counterparties are not pegged to the same index.
B"basis risk" refers to a situation in which the floating rates of the two counterparties are not pegged
. 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.
C"basis risk" refers to interest rate changing unfavorably before the swap bank can lay off to an
. opposing counterparty the other side of an interest rate swap entered into with a counterparty,
and "sovereign risk" refers to the probability that a country will impose exchange restrictions on a
currency involved in a swap.
D"basis risk" refers to the risk of fluctuating exchange rates, and "sovereign risk" refers to a situation
. in which the floating rates of the two counterparties are not pegged to the same index.
Eun - Chapter 14 #51
Topic: Risks of Interest Rate and Currency Swaps
52.
53.
In an efficient market without barriers to capital flows, the cost-savings argument of the QSD is
difficult to accept, because
A it implies that an arbitrage opportunity exists because of some mispricing of the default risk
. premiums on different types of debt instruments.
B.it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on
different maturities of forward contracts.
C. none of the above
Eun - Chapter 14 #53
Topic: Is the Swap Market Efficient
54.
55.
56.
Consider a plain vanilla interest rate swap. Firm A can borrow at 8% fixed or can borrow floating at
LIBOR. Firm B is somewhat less creditworthy and can borrow at 10% fixed or can borrow floating at
LIBOR + 1%. Eun wants to borrow floating and Resnick prefers to borrow fixed. Both corporations
wish to borrow $10 million for 5 years. 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; agrees to swap LIBOR to firm B for
. 8 % fixed for 5 years on a notational principal of $5 million; B borrows $10 million externally at
10%.
BA borrows $10 million externally for 5 years at LIBOR; agrees to pay 8% to B for LIBOR fixed
. for 5 years on a notational principal of $5 million; B borrows $10 million externally at 10%.
C. Since the QSD = 0 there is no mutually beneficial swap.
DA borrows $10 million externally at 8% fixed for 5 years; agrees to swap LIBOR to B for 8% fixed
. for 5 years on a notational principal of $5 million; B borrows $10 million externally at LIBOR + 1%.
Eun - Chapter 14 #56
Topic: Miscellaneous Swap Problems
57.
Consider fixed-for-fixed currency swap. Firm A is a U.S.-based multinational. Firm B is a U.K.based multinational. Firm A wants to finance a 2 million expansion in Great Britain. Firm B wants
to finance a $4 million expansion in the U.S. The spot exchange rate is 1.00 = $2.00. Firm A can
borrow dollars at $10% and pounds sterling at 12%. Firm B can borrow dollars at 9% and pounds
sterling at 11%. Which of the following swaps is mutually beneficial to each party and meets their
financing needs? Neither party should face exchange rate risk.
A. There is no mutually beneficial swap that has neither party facing exchange rate risk.
B Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2
. million pounds and pays 8% in dollars to A.
C Firm A should borrow $2 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 4
. million pounds and pays 8% in dollars to A.
D Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2
. million pounds and pays 10% in dollars to A.
Eun - Chapter 14 #57
Topic: Miscellaneous Swap Problems
58.
Consider bank that has entered into a five-year swap on a notational balance of $10,000,000 with a
corporate customer who has agreed to pay a fixed payment of 10 percent in exchange for LIBOR. As
of the fourth reset date, 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. LIBOR is at 5 percent.
A. $909,090.91 gain.
B. $90,090.09 loss.
C. No loss or no gain since maturity has not arrived.
D. $90,090.09 gain.
Eun - Chapter 14 #58
Topic: Miscellaneous Swap Problems
59.
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 + percent on a notational principal of $5 million in exchange for fixed rate
payments of 6 percent.
A. LIBOR + percent
B. LIBOR
C. LIBOR - percent
D. None of the above
Eun - Chapter 14 #59
Topic: Miscellaneous Swap Problems
60.
Consider a fixed for fixed currency swap. The Dow Corporation is a U.S.-based multinational. The
Jones Corporation is a U.K.-based multinational. Dow wants to finance a 2 million expansion in
Great Britain. Jones wants to finance a $4 million expansion in the U.S. The spot exchange rate is
1.00 = $2.00. Dow can borrow dollars at $10% and pounds sterling at 12%. Jones can borrow dollars
at 9% and pounds sterling at 10%. Assuming that the swap bank is willing to take on exchange rate
risk, but the other counterparties are not, 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%; pay 11% in pounds to the swap bank
. on a notational principal of 2 million; receive $10% from the swap bank on a notational principal of
$4million. Jones, borrows 2 million pounds externally at 10%; pays $8% 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.
BDow should borrow $4 million in dollars externally at $10%; pay 11 % in pounds to the swap
. bank on a notational principal of 2 million; receive $10% from the swap bank on a notational
principal of $4 million. Jones, borrows 2 million pounds externally at 10%; pays $8% 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.
CDow should borrow $4 million in dollars externally at $10%; pay 11% in pounds to the swap bank
. on a notational principal of 2 million; receive $8% from the swap bank on a notational principal of
$4 million. Jones, borrows 2 million pounds externally at 10%; 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.
D. There is no swap that is possible.
Eun - Chapter 14 #60
Topic: Miscellaneous Swap Problems
61.
With regard to a swap bank acting as a dealer in swap transactions, interest rate risk refers to
A. the risk that arises from the situation in which the floating-rates of the two counterparties are not
pegged to the same index.
Bthe risk that interest rates changing unfavorably before the swap bank can lay off to an opposing
. counterparty on the other side of an interest rate swap entered into with the first counterparty.
C the risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to
. lay off a swap it undertakes with one counterparty with an opposing transaction.
D. the risk that a counterparty will default.
Eun - Chapter 14 #61
Topic: Miscellaneous Swap Problems
62.
With regard to a swap bank acting as a dealer in swap transactions, mismatch risk refers to
A. the risk that arises from the situation in which the floating-rates of the two counterparties are not
pegged to the same index.
Bthe risk that interest rates changing unfavorably before the sap bank can lay off to an opposing
. counterparty on the other side of an interest rate swap entered into with the first counterparty.
C the risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to
. lay off a swap it undertakes with one counterparty with an opposing transaction.
D. the risk that it may be difficult or impossible to find an exact opposite match for a swap the bank
has agreed take.
Eun - Chapter 14 #62
Topic: Miscellaneous Swap Problems
63.
You are the debt manager for a U.S.-based multinational. You need to borrow 100,000,000 for five
years. You can either borrow the 100,000,000 directly in Germany or borrow dollars in the U.S. and
enter into a combined interest rate and currency swap with a swap bank. One risk that you face by
using the swap that you do not face by borrowing euros directly is
A. exchange rate risk.
B. sovereign risk.
C. credit risk.
D. interest rate risk.
Eun - Chapter 14 #63
Topic: Miscellaneous Swap Problems
64.
Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as
shown. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR.
In other words, what you be willing to pay in euro against receiving USD LIBOR?
A. 5%
B. 4%
C. 3%
D. 2%
Eun - Chapter 14 #64
Topic: Miscellaneous Swap Problems
65.
Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as
shown. Develop the 3-year bid price of a dollar swap quoted against flat USD LIBOR.
In other words, what you be willing to pay in euro against receiving USD LIBOR?
A. 5%
B. 4%
C. 3%
D. 2%
Eun - Chapter 14 #65
Topic: Miscellaneous Swap Problems
66.
Suppose that you are a swap bank and you notice that interest rates on coupon bonds are as shown.
Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. The current spot
exchange rate is $1.50 per 1.00. The size of the swap is 40 million versus $60 million.
In other words, what you be willing to pay in euro against receiving USD LIBOR?
A. 7%
B. 6%
C. 5%
D. None of the above
Eun - Chapter 14 #66
Topic: Miscellaneous Swap Problems