Exam 15: Swap Markets

____ risk prevents an interest rate swap from completely eliminating a financial institution's exposure to interest rate risk.

An equity swap involves the exchange of dividend payments for payments linked to the degree of change in a stock index.

A plain vanilla swap enables firms to exchange ____ for ____.

Which of the following is a reason why financial institutions engage in interest rate swaps?

The option on a putable swap would most likely be exercised if interest rates

Interest rate swaps are rarely used by companies that issue bonds.

If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterparty is likely adversely affected by ____ interest rates.

Financial institutions with ____ interest rate-sensitive liabilities than assets are ____ affected by rising interest rates.

The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates.

An advantage of a ____ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments.

A(n)____ swap allows the party making fixed-rate payments to terminate the swap prior to maturity.

Sovereign risk differs from credit risk because it is dependent on the financial status of the government rather than the counterparty itself.

An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor.

An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate .

Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Average each year over a three-year period. The notional principal is $1 million. If the Dow depreciates by 1 percent over the year, Hewitt will

During the credit crisis, many mortgage-backed securities defaulted, generating large profits for sellers of credit default swaps and large losses for buyers of the swaps.

A common maturity of a credit default swap contract is

The primary purpose of interest rate swaps is to reduce exchange rate risk.

A(n)____ swap involves an exchange of interest payments over a swap period that does not begin until a specified future point in time.

Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. LIBOR is 9 percent, 12 percent, and 13 percent at the end of each of the next three years, respectively. The total payments received (or paid)by Lizard, including the initial fee, are $____.