Question 1

A major risk faced by a swap dealer is sovereign risk.This is

Accepted Answer

A) the probability that a sovereign counterparty will default. 
B) the probability that a country will impose exchange restrictions on a currency involved in an existing swap. 
C) the probability governments will intervene to support an exchange rate. 
D) none of the options 
A) the probability that a sovereign counterparty will default. 
B) the probability that a country will impose exchange restrictions on a currency involved in an existing swap. 
C) the probability governments will intervene to support an exchange rate. 
D) none of the options

Question 2

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: $$\begin{array} { c c c } 
& \text { \$Borrowing } & \text { £Borrowing } \
& \text { Cost } & \text { Cost } \
\text { Compary X }  & \$ 8 \% & £ 7 \% \
\text { Compary Y }& \$ 9 \% & £ G \%
\end{array}$$ 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.
Company X

Accepted Answer

A) is probably British. 
B) is probably American. 
C) has a comparative advantage in borrowing pounds. 
D) is probably British,and has a comparative advantage in borrowing pounds. 
A) is probably British. 
B) is probably American. 
C) has a comparative advantage in borrowing pounds. 
D) is probably British,and has a comparative advantage in borrowing pounds.

Question 3

Come up with a swap (exchange of interest and principal)for parties A and B who have the following borrowing opportunities.
 $\begin{array}{lll} 
& € & \$ \
\mathrm{~A} & € 5 \% & \$ LIBOR \% \
\mathrm{~B} & € 6 \% & \$ \mathrm{LBOR}+1 / 2 \%
\end{array}$ 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.

Accepted Answer

The answer of Come up with a swap (exchange of...

Question 4

A major that can be eliminated through a swap is exchange rate risk.

Accepted Answer

A) But only to the extent that a foreign counterparty will not default in a currency swap. 
B) But only if the bid-ask spreads are wide. 
C) But swaps can be less efficient in this than just trading at the expected spot exchange rates each year. 
D) none of the options 
A) But only to the extent that a foreign counterparty will not default in a currency swap. 
B) But only if the bid-ask spreads are wide. 
C) But swaps can be less efficient in this than just trading at the expected spot exchange rates each year. 
D) none of the options

Question 5

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 percent and pounds sterling at 12 percent.Jones can borrow dollars at 9 percent and pounds sterling at 10 percent.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?

Accepted Answer

A) Dow should borrow $4 million in dollars externally at $10 percent; pay £11¾ percent in pounds to the swap bank on a notational principal of £2 million; receive $10 percent from the swap bank on a notational principal of $4 million.Jones,borrows £2 million pounds externally at £10 percent; pays $8¾ percent to the swap bank on a notational principal of $4 million and receives £10 percent in pounds from the swap bank on a notational principal of £2 million. 
B) Dow should borrow $4 million in dollars externally at $10 percent; pay £11½ percent in pounds to the swap bank on a notational principal of £2 million; receive $10 percent from the swap bank on a notational principal of $4 million.Jones,borrows £2 million pounds externally at £10 percent; pays $8½ percent to the swap bank on a notational principal of $4 million and receives £10 percent in pounds from the swap bank on a notational principal of £2 million. 
C) Dow should borrow $4 million in dollars externally at $10 percent; pay £11 percent in pounds to the swap bank on a notational principal of £2 million; receive $8 percent from the swap bank on a notational principal of $4 million.Jones,borrows £2 million pounds externally at £10 percent; pays $10 percent to the swap bank on a notational principal of $4 million and receives £11 percent in pounds from the swap bank on a notational principal of £2 million. 
D) There is no swap that is possible. 
A) Dow should borrow $4 million in dollars externally at $10 percent; pay £11¾ percent in pounds to the swap bank on a notational principal of £2 million; receive $10 percent from the swap bank on a notational principal of $4 million.Jones,borrows £2 million pounds externally at £10 percent; pays $8¾ percent to the swap bank on a notational principal of $4 million and receives £10 percent in pounds from the swap bank on a notational principal of £2 million. 
B) Dow should borrow $4 million in dollars externally at $10 percent; pay £11½ percent in pounds to the swap bank on a notational principal of £2 million; receive $10 percent from the swap bank on a notational principal of $4 million.Jones,borrows £2 million pounds externally at £10 percent; pays $8½ percent to the swap bank on a notational principal of $4 million and receives £10 percent in pounds from the swap bank on a notational principal of £2 million. 
C) Dow should borrow $4 million in dollars externally at $10 percent; pay £11 percent in pounds to the swap bank on a notational principal of £2 million; receive $8 percent from the swap bank on a notational principal of $4 million.Jones,borrows £2 million pounds externally at £10 percent; pays $10 percent to the swap bank on a notational principal of $4 million and receives £11 percent in pounds from the swap bank on a notational principal of £2 million. 
D) There is no swap that is possible.

Question 6

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.
 $$\begin{array} { l l l } 
& \$ & £ \
\text { A } & \$ 6 \% & £5 \% \
B & \$7 \% & £ 4\%
\end{array}$$ Explain how this opportunity affects which swap firm B will be willing to participate in.

Accepted Answer

Since B can redenominate a £30

Question 7

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. USD Euro
$$\begin{array} { c c c c } 
\text { Bid } & \text { Ask } & \text { Bid } & \text { Ask } \
8 \% & 8.1 \% & 6 \%& 6.1 \%
\end{array}$$ The firms external borrowing opportunities are
$\begin{array}{ccc} 
& € \text { borrowing } & \$ \text { borrowing } \
\mathrm{A} & € 7 \% & \$ 8 \% \
\mathrm{~B} & € 6 \% & \$ 9 \%
\end{array}$

Accepted Answer

A) Firm 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. 
C) Firm 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 options 
A) Firm 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. 
C) Firm 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 options

Question 8

The size of the swap market (as of mid-year 2015)is

Accepted Answer

A) measured by notational principal. 
B) over 23 trillion dollars. 
C) measured by notational principal and over 23 trillion dollars. 
D) none of the options 
A) measured by notational principal. 
B) over 23 trillion dollars. 
C) measured by notational principal and over 23 trillion dollars. 
D) none of the options

Question 9

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. 
$$\begin{array} { c c c } 
& \text { Fixed-Rate Borrowirg } & \text { Floating-Rate BorTownre } \
&\text { Cost } & \text {  Cost } \
\text { Compary X } & 10 \% & \text { LIBOR } \
\text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \%
\end{array}$$ A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05 percent -10.45 percent 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?

Accepted Answer

A) 10.45% ?10.45% against LIBOR flat. 
B) 10.45%?10.05% against LIBOR flat. 
C) 10.50%?10.50% against LIBOR flat. 
D) none of the options 
A) 10.45% ?10.45% against LIBOR flat. 
B) 10.45%?10.05% against LIBOR flat. 
C) 10.50%?10.50% against LIBOR flat. 
D) none of the options

Question 10

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:

Accepted Answer

A) fixed-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. 
B) fixed-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 counterparty denominated in another currency. 
C) fixed-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,as well as fixed-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 counterparty denominated in another currency. 
D) none of the options 
A) fixed-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. 
B) fixed-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 counterparty denominated in another currency. 
C) fixed-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,as well as fixed-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 counterparty denominated in another currency. 
D) none of the options

Question 11

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 percent−11.30 percent annually against six-month dollar LIBOR for British pound sterling.ABC would enter into a $/£ currency swap in which:

Accepted Answer

A) it would pay annual fixed-rate dollar payments of 7.5 percent in return for receiving annual fixed-rate £ payments at 11.3 percent. 
B) it will receive annual fixed-rate dollar payments at 7.85 percent against paying annual fixed-rate £ payments at 11 percent. 
C) it would pay annual fixed-rate dollar payments of 7.5 percent in return for receiving annual fixed-rate £ payments at 11.3 percent,and it will receive annual fixed-rate dollar payments at 7.85 percent against paying annual fixed-rate £ payments at 11 percent. 
D) none of the options 
A) it would pay annual fixed-rate dollar payments of 7.5 percent in return for receiving annual fixed-rate £ payments at 11.3 percent. 
B) it will receive annual fixed-rate dollar payments at 7.85 percent against paying annual fixed-rate £ payments at 11 percent. 
C) it would pay annual fixed-rate dollar payments of 7.5 percent in return for receiving annual fixed-rate £ payments at 11.3 percent,and it will receive annual fixed-rate dollar payments at 7.85 percent against paying annual fixed-rate £ payments at 11 percent. 
D) none of the options

Question 12

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. $\begin{array}{ll}
\text { Rates } & \text { 3-year } \
\text { USD } & \$ 7 \% \
\text { Euro } & € 5 \%
\end{array}$ In other words,what will you be willing to pay in euro against receiving USD LIBOR?

Accepted Answer

A) 7 percent 
B) 6 percent 
C) 5 percent 
D) none of the options 
A) 7 percent 
B) 6 percent 
C) 5 percent 
D) none of the options

Question 13

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 percent and pounds sterling at 12 percent.Firm B can borrow dollars at 9 percent and pounds sterling at 11 percent.Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk.

Accepted Answer

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 percent in pounds to Firm B,who in turn borrows 2 million pounds and pays 8 percent in dollars to A. 
C) Firm A should borrow $2 million in dollars,pay 11 percent in pounds to Firm B,who in turn borrows 4 million pounds and pays 8 percent in dollars to A. 
D) Firm A should borrow $4 million in dollars,pay 11 percent in pounds to Firm B,who in turn borrows 2 million pounds and pays 10 percent in dollars to A. 
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 percent in pounds to Firm B,who in turn borrows 2 million pounds and pays 8 percent in dollars to A. 
C) Firm A should borrow $2 million in dollars,pay 11 percent in pounds to Firm B,who in turn borrows 4 million pounds and pays 8 percent in dollars to A. 
D) Firm A should borrow $4 million in dollars,pay 11 percent in pounds to Firm B,who in turn borrows 2 million pounds and pays 10 percent in dollars to A.

Question 14

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 here: $$\begin{array} { c c c } 
& \text { Fixed-Rate } & \text { Floating-Rate } \
&\text { Borrowing Cost } & \text { Bortowing Cost } \
\text { Compary X } & 10 \% & \text { LIBOR } \
\text { Compary Y } & 12 \% & \text { LIBOR } + 1.5 \%
\end{array}$$ 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 percent.In exchange the swap bank will pay to company Y interest payments on $10,000,000 at LIBOR ? 0.15 percent; What is the value of this swap to company Y?

Accepted Answer

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. 
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.

Question 15

An interest-only single currency interest rate swap

Accepted Answer

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 options 
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 options

Question 16

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. $\begin{array}{lccc}
\text { Zero Rates } & 1 \text {-year } & \text { 2-year } & 3 \text {-year } \
\text { USD } & \$ 3 \% & \$ 4 \% & \$ 5 \% \
\text { Euro } & € 2 \% & € 3 \% & € 4 \%
\end{array}$ In other words,what will you be willing to pay in euro against receiving USD LIBOR?

Accepted Answer

A) 5 percent 
B) 4 percent 
C) 3 percent 
D) 2 percent 
A) 5 percent 
B) 4 percent 
C) 3 percent 
D) 2 percent

Question 17

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

Accepted Answer

A) the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month 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 options 
A) the swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month 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 options

Question 18

In a currency swap,

Accepted Answer

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) it may be the case that two counterparties have equivalent credit ratings,and it may also be the case that firms have a comparative advantage in borrowing in their domestic markets. 
D) none of the options 
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) it may be the case that two counterparties have equivalent credit ratings,and it may also be the case that firms have a comparative advantage in borrowing in their domestic markets. 
D) none of the options

Question 19

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.
 $$\begin{array} { l l l } 
& \$ & € \
\text { A } & \$ 7 \% & € 6 \% \
B & \$8 \% & € 5\%
\end{array}$$ 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.
                   USD                                          EURO            
          bid                 ask                          bid                 ask

Accepted Answer

USD Euro \[\begin{array} { c c

Question 20

With regard to a swap bank acting as a dealer in swap transactions,mismatch risk refers to

Accepted Answer

A) the risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index. 
B) the 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 it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed take. 
A) the risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index. 
B) the 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 it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed take.

A major risk faced by a swap dealer is sovereign risk.This is

A major that can be eliminated through a swap is exchange rate risk.

The size of the swap market (as of mid-year 2015)is

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:

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 percent−11.30 percent annually against six-month dollar LIBOR for British pound sterling.ABC would enter into a $/£ currency swap in which:

An interest-only single currency interest rate swap

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

In a currency swap,

With regard to a swap bank acting as a dealer in swap transactions,mismatch risk refers to

International Monetary System

Globalization and the Multinational Firm

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

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Exam 14: Interest Rate and Currency Swaps

A major risk faced by a swap dealer is sovereign risk.This is

A major that can be eliminated through a swap is exchange rate risk.

The size of the swap market (as of mid-year 2015)is

Examples of "single-currency interest rate swap" and "cross-currency interest rate swap" are:

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 percent−11.30 percent annually against six-month dollar LIBOR for British pound sterling.ABC would enter into a $/£ currency swap in which:

An interest-only single currency interest rate swap

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

In a currency swap,

With regard to a swap bank acting as a dealer in swap transactions,mismatch risk refers to

International Monetary System

Globalization and the Multinational Firm

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters