Question 1

When compared to swap and option contracts,credit risk exposure is greatest with a futures contract.

Accepted Answer

A) True 
 B)False

Question 2

A total return swap involves exchanging an obligation to pay interest at a specified rate for payments representing the total return on a loan or a bond of a specified amount.

Accepted Answer

A) True 
 B)False

Question 3

If a U.S.bank has variable-rate assets in U.S.dollars and fixed-rate liabilities in Euros,the bank is exposed to

Accepted Answer

A) interest rate increases and an appreciation of the dollar. 
B) interest rate declines and an appreciation of the dollar. 
C) interest rate increases and a depreciation of the dollar. 
D) interest rate declines and a depreciation of the dollar. 
A) interest rate increases and an appreciation of the dollar. 
B) interest rate declines and an appreciation of the dollar. 
C) interest rate increases and a depreciation of the dollar. 
D) interest rate declines and a depreciation of the dollar.

Question 4

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2)percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1)percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR.

What will be the net after-swap cost of funds for the thrift if the cash market liabilities are included in the analysis?

Accepted Answer

A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent.

Question 5

In the derivatives markets,the credit risk exposure is greatest for

Accepted Answer

A) options. 
B) futures. 
C) forwards. 
D) swaps. 
A) options. 
B) futures. 
C) forwards. 
D) swaps.

Question 6

A pure credit swap

Accepted Answer

A) is like buying credit insurance. 
B) is like buying a multi-period credit option. 
C) eliminates the interest rate risk contained in a total return swap. 
D) All of the options. 
A) is like buying credit insurance. 
B) is like buying a multi-period credit option. 
C) eliminates the interest rate risk contained in a total return swap. 
D) All of the options.

Question 7

In a pure credit swap the FI lender makes a payment each period in exchange for the payment of interest in any period that the borrower defaults on the loan.

Accepted Answer

A) True 
 B)False

Question 8

In a conventional interest rate swap agreement,the swap buyer agrees to make a number of fixed interest rate payments to the swap seller.

Accepted Answer

A) True 
 B)False

Question 9

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 2,LIBOR rates are 6 percent and the exchange rate is $1.50/£.What is the net payment paid or received in dollars by the U.S.bank?

Accepted Answer

A) The U.S.bank paid $9 million and received $9 million for a net payment of $0 million. 
B) The U.S.bank paid $9 million and received $15 million for a net receipt of $6 million. 
C) The U.S.bank paid $12 million and received $9 million for a net payment of $3 million. 
D) The U.S.bank paid $12 million and received $12 million for a net payment of $0 million. 
E) The U.S.bank paid $12 million and received $15 million for a net receipt of $3 million. 
A) The U.S.bank paid $9 million and received $9 million for a net payment of $0 million. 
B) The U.S.bank paid $9 million and received $15 million for a net receipt of $6 million. 
C) The U.S.bank paid $12 million and received $9 million for a net payment of $3 million. 
D) The U.S.bank paid $12 million and received $12 million for a net payment of $0 million. 
E) The U.S.bank paid $12 million and received $15 million for a net receipt of $3 million.

Question 10

A total return credit swap is eliminates interest rate risk as well as credit risk.

Accepted Answer

A) True 
 B)False

Question 11

An FI has entered a $100 million swap agreement with a counterparty.The fixed-payment portion of the swap is similar to a government bond with maturity of 6 years and duration of 5 years.The swap payment interval is 1 year.If the relative shock to interest rates [$\Delta$R/(1 + R)] is a decline of 50 basis points,what will be the change in market value of the swap contract?

Accepted Answer

A) +$2.0 million. 
B) -$2.0 million. 
C) +$2.5 million. 
D) -$2.5 million. 
A) +$2.0 million. 
B) -$2.0 million. 
C) +$2.5 million. 
D) -$2.5 million.

Question 12

At the end of 2015,the world-wide notational value of swap agreements was less than $400 trillion.

Accepted Answer

A) True 
 B)False

Question 13

A pure credit swap will reduce interest rate risk.

Accepted Answer

A) True 
 B)False

Question 14

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2)percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1)percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR.

Assume that the thrift variable-rate liabilities are CDs indexed to some domestic rate.Which of the following statements describes the hedge characteristics of the above example?

Accepted Answer

A) The thrift is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates. 
B) Only the bank is fully hedged. 
C) The thrift is exposed to basis risk if the credit/default risk premium on the thrift's CDs increases over time. 
D) All of the options. 
A) The thrift is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates. 
B) Only the bank is fully hedged. 
C) The thrift is exposed to basis risk if the credit/default risk premium on the thrift's CDs increases over time. 
D) All of the options.

Question 15

Determining the pricing of a swap agreement requires the calculation of expected one-year rates from the Treasury yield curve that is accomplished by calculating the spot or zero-coupon discount yield curve.

Accepted Answer

A) True 
 B)False

Question 16

The fastest growing group of swaps in recent years has been those designed to help FIs manage interest rate risk.

Accepted Answer

A) True 
 B)False

Question 17

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2)percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1)percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR.

What will be the net after-swap cost of funds for the bank if the cash market liabilities are included in the analysis?

Accepted Answer

A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent.

Question 18

By 2008,the insurance company AIG had more than $440 billion in credit default swaps outstanding.

Accepted Answer

A) True 
 B)False

Question 19

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.

What is the nominal payment paid or received by the U.S.bank over the three year period?

Accepted Answer

A) The U.S.bank received $2 million over the three year period. 
B) The U.S.bank received $1 million over the three year period. 
C) The U.S.bank paid $0 over the 3 year period. 
D) The U.S.bank paid $1 million over the three period. 
A) The U.S.bank received $2 million over the three year period. 
B) The U.S.bank received $1 million over the three year period. 
C) The U.S.bank paid $0 over the 3 year period. 
D) The U.S.bank paid $1 million over the three period.

Question 20

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.

At the end of the year,the exchange rate is €2/$.What are the losses and gains to each bank as a result of this swap compared to the scenario without the swap?

Accepted Answer

A) With the agreement,Bank Dresdner pays €2.5 million less while Bank USA pays $1.25 million more. 
B) With the agreement,Bank Dresdner pays €2.5 million more while Bank USA pays $1.25 million less. 
C) With the agreement,Bank USA pays $3.75 million less while Bank Dresdner pays €7.5 million more. 
D) With the agreement,Bank USA pays $3.75 million more while Bank Dresdner pays €7.5 million less. 
A) With the agreement,Bank Dresdner pays €2.5 million less while Bank USA pays $1.25 million more. 
B) With the agreement,Bank Dresdner pays €2.5 million more while Bank USA pays $1.25 million less. 
C) With the agreement,Bank USA pays $3.75 million less while Bank Dresdner pays €7.5 million more. 
D) With the agreement,Bank USA pays $3.75 million more while Bank Dresdner pays €7.5 million less.

When compared to swap and option contracts,credit risk exposure is greatest with a futures contract.

A total return swap involves exchanging an obligation to pay interest at a specified rate for payments representing the total return on a loan or a bond of a specified amount.

If a U.S.bank has variable-rate assets in U.S.dollars and fixed-rate liabilities in Euros,the bank is exposed to

In the derivatives markets,the credit risk exposure is greatest for

A pure credit swap

In a pure credit swap the FI lender makes a payment each period in exchange for the payment of interest in any period that the borrower defaults on the loan.

In a conventional interest rate swap agreement,the swap buyer agrees to make a number of fixed interest rate payments to the swap seller.

A total return credit swap is eliminates interest rate risk as well as credit risk.

At the end of 2015,the world-wide notational value of swap agreements was less than $400 trillion.

A pure credit swap will reduce interest rate risk.

Determining the pricing of a swap agreement requires the calculation of expected one-year rates from the Treasury yield curve that is accomplished by calculating the spot or zero-coupon discount yield curve.

The fastest growing group of swaps in recent years has been those designed to help FIs manage interest rate risk.

By 2008,the insurance company AIG had more than $440 billion in credit default swaps outstanding.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Loan Sales

Securitization

Filters

Exam 24: Swaps

When compared to swap and option contracts,credit risk exposure is greatest with a futures contract.

A total return swap involves exchanging an obligation to pay interest at a specified rate for payments representing the total return on a loan or a bond of a specified amount.

If a U.S.bank has variable-rate assets in U.S.dollars and fixed-rate liabilities in Euros,the bank is exposed to

In the derivatives markets,the credit risk exposure is greatest for

A pure credit swap

In a pure credit swap the FI lender makes a payment each period in exchange for the payment of interest in any period that the borrower defaults on the loan.

In a conventional interest rate swap agreement,the swap buyer agrees to make a number of fixed interest rate payments to the swap seller.

A total return credit swap is eliminates interest rate risk as well as credit risk.

At the end of 2015,the world-wide notational value of swap agreements was less than $400 trillion.

A pure credit swap will reduce interest rate risk.

Determining the pricing of a swap agreement requires the calculation of expected one-year rates from the Treasury yield curve that is accomplished by calculating the spot or zero-coupon discount yield curve.

The fastest growing group of swaps in recent years has been those designed to help FIs manage interest rate risk.

By 2008,the insurance company AIG had more than $440 billion in credit default swaps outstanding.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Loan Sales

Securitization

Filters