Exam 24: Swaps

Bank USA has fixed-rate assets of $50 million funded by fixed-rate liabilities of 75 million Euros paying an interest rate of 10 percent annually.Bank Dresdner has fixed-rate assets of €75 million funded by fixed-rate liabilities of $50 million paying an interest rate of 10 percent annually. The current exchange rate is €1.50/$.They agree to swap interest payments on their liabilities to hedge against currency risk exposure for two years. The transaction each year consists of

A swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities is

When are the standby letters of credit used in swap agreements?

Swap dealers are forbidden from guaranteeing swap payments between two counterparties through the life of the payment.

Once a fixed-floating interest rate swap agreement has been negotiated under no-arbitrage conditions,both parties to the swap agreement know with certainty the exact amount of their respective cash flows.

It is common to include

Which of the following is NOT a reason that a swap may have less credit risk than an individual loan?

Which of the following is an advantage of having swap dealers?

It is possible to negotiate a swap in which the notational value changes over the life of the swap.

The cash flows that actually are paid on an interest rate swap depend on

Swap contracts are actively traded on the

A pure credit swap is similar to buying credit insurance.

Swaps create value if

One reason for basis risk in an interest rate swap is that changes in the index on the variable rate portion of the swap may not be perfectly correlated with changes in the index on the balance sheet portion of the liabilities.

The fastest growing type of swap is

Which of the following is NOT true?

Which of the following is NOT a reason for the credit risk on a swap to be less than the credit risk on a loan?

Both parties in an interest rate swap normally are fully hedged against interest rate risk on the notional amount of the swap.

The type of swap that is in the largest segment of the global swap market is

A U.S.bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million.The current exchange rate is $1.50/£.The interest payments will be exchanged at the end of the year at the prevailing rates. At the end of year 3,LIBOR rates are 6 percent and the exchange rate is $1.10/£.What is the net payment paid or received in dollars by the U.S.bank?