Exam 8: Swaps

Assume oat forward prices over the next 3 years are $2.25,$2.35,and $2.28,respectively.Effective annual interest rates over the same period are 5.2%,5.5%,and 5.8%.What is the ?2-year swap price on a hypothetical "forward swap" that begins at the end of year 1?

Assume oat spot prices over the next 3 years are $2.20,$2.35,and $2.28,respectively.The original swap price was $2.30 per bushel.If cash settlement occurs,what transaction will the counter-party make in year 2 on a 5,000-bushel swap agreement?

Explain a "diff swap" as it relates to currency swaps.

Assume the net swap payment is $.50 on a reverse transaction involving a 3-year oat swap.What is the market value of the swap given interest rates on zero coupon treasury bonds are 5.2%,5.6%,and 6.0% for 1,2,and 3 years,respectively?

The forward prices on a barrel of crude oil are $112 and $118 in years one and two,respectively.The interest rates on zero coupon government bonds are 3.0% and 3.5% in years one and two,respectively.What is the likely 2-year swap price on a barrel of crude oil?

The 3-year swap price on a new oat swap agreement is $5.94.Interest rates immediately rise on 1,2,and 3-year zero coupon bonds from 5.1%,5.4%,and 5.7% to 5.2%,5.6%,and 6.0%,respectively.What is net swap payment per year if the reverse transaction occurs? Assume year 1,2,and 3 forward prices are $2.05,$2.15,and $2.30,respectively and do not change.

Euro dollar futures prices with maturities of 3,6,and 9 months are 89.04,88.75,and 88.55,respectively.What is the annualized swap rate on 9-month securities?

IBM and AT&T decide to swap $1 million loans.IBM currently pays 9.0% fixed and AT&T pays 8.5% on a LIBOR + 0.5% loan.What is the net cash flow for IBM if they swap their fixed loan for a LIBOR + 0.5% loan and LIBOR rises to 8.5%?

Describe briefly the nature of a swap and its primary component.

Under what circumstances would a multinational company elect to enter into a currency swap agreement?

An investor enters into a 2-year swap agreement to euros at $1.32 per euro.Soon after the swap is created forward prices rise and the new swap price on a similar swap is $1.45.If dollar denominated interest rates are 4.0% and 4.5% on 1- and 2-year zero coupon government bonds,respectively,what is the gain to be made from unwrapping the original swap agreement?

Why do arbitrage profits rarely exist in interest rate swap pricing?

Your company can get yen loans for 2.0%.Dollar rates on the same loans are 4.5%.The spot yen per dollar exchange rate is 104.The forward rates for years 1 thru 4 are,101.51,99.08,96.71,and 94.40,respectively.What is the present value of the market-maker's net cash flow if spot rates are 102 instead?

An investor enters into a 2-year swap agreement to purchase crude oil at $105.65 per barrel.Soon after the swap is created forward prices rise and the new swap price on a similar swap is $108.32.If interest rates are 3.0% per year,what is the gain to be made from unwrapping the original swap agreement?

How does the existence of swaptions add to the possibilities in risk management techniques? While option strategies have not yet been discussed,students should be able to draw conclusions from prior chapters.Lead the class in a discussion of how options lead to an infinite range of possible strategies for swap investors.

What is the 3-year swap price on corn? Assume interest rates over the next 3 years are 2.0%,2.5%,and 2.8%.The prepaid swap price is given as $15.50.

Given zero-coupon bond yields are 2.0%,2.5%,and 2.8% in years 1,2,and 3,respectively,calculate the prepaid swap price for corn.Assume corn forward prices for the proceeding 3 years are $5.00,$5.20,and $5.35,respectively.

A portfolio manager enters into a total return swap.She swaps 50% of her $50 million index based portfolio for 4.5% yield bonds.If the annualized total return on the index is 2.5%,what net cash flow will the manager experience under the swap agreement?

Your company can get yen loans for 2.0%.Dollar rates on the same loans are 4.5%.The spot yen per dollar exchange rate is 104.The forward rates for years 1 thru 4 are,101.51,99.08,96.71,and 94.40,respectively.What is the dollar value of a 4-year 1 million yen loan?

How would a market-maker hedge a swap involving variable price and quantity?