Exam 15: Swap Markets

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

Which of the following is not a typical provision of an interest rate swap?

A firm is involved in an agreement whereby it receives payments in periods when a market interest rate falls below an interest rate level specified in the agreement. This means that the firmhas

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

Systemic risk is the risk that a firm involved in an interest rate swap may not meet its payment obligations.

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

Financial institutions primarily use interest rate swaps in a way that will ____ exposure to interest rate risk and ____ potential returns.

A ____ swap involves the exchange of fixed-rate payments for floating-rate payments that are capped.

The Bank of Moronto has negotiated a plain vanilla swap whereby it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the nextthree years. In the first year, LIBOR is 8 percent; in the second year, 9 percent; in the third year, LIBOR is 7 percent. What is the total net payment the Bank of Moronto makes over the three-year period if the notional principal is $10 million?

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

After the credit crisis, new rules and regulations were issued to reform the swap markets. Which of the following is not one of the requirements of these new rules and regulations?

Interest rate floors are commonly used to hedge against lower interest rates.

AIG's financial problems during the credit crisis were attributed to:

____ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party.

Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps.

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

The advantage of a rate-capped interest rate swap (relative to a plain vanilla swap) to the party exchanging fixed payments for floating payments is that

If a firm negotiates a plain vanilla swap, it will provide ____ payments in exchange for ____ payments.

____ swap provides the party making the floating-rate payments with a right to terminate the swap.

____ swap allows the party making fixed-rate payments to terminate the swap prior to maturity.