Exam 24: Swaps

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.

Which of the following is true of the "netting" process in the swap market?

The secondary market for the trading of swaps is second in liquidity to the U.S. T-bill market.

A swap that technically is a succession of forward contracts on interest rates is

The extreme growth of the swap market has raised concern about the credit risk exposures of banks engaging in this market.

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?

The notational value of swaps that are held by commercial banks as of 2012 was over $130 trillion.

Which of the following is the primary factor that determines the fixed and floating rates set at the time an interest rate swap is initiated?

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

A pure credit swap is similar to buying credit insurance.

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

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

The Wall Street Reform and Consumer Protection Act of 2010 established comprehensive regulation of over-the-counter (OTC) derivatives including swaps.

The Commodity Futures Trading Commission (CFTC) has jurisdiction over swaps.

The largest segment of the global swap market is the currency swap market.

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

What kind of interest rate swap (of liabilities) would an FI with a positive funding gap utilize to hedge interest rate risk exposure?

Swap transactions are homogeneous in nature so that the contracts can be easily traded in the secondary market for swaps.

An existing swap can be effectively hedged against interest rate risk by

An interest rate swap is essentially a series of forward contracts on interest rates.