Exam 24: Swaps

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

An FI has purchased an agency security that is an inverse floater at 9 percent minus LIBOR. Which of the following characteristics reflect this type of asset?

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 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?

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

A swap that often involves an up-front fee or payment as compensation for nonstandard terms is

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.

Whether fixed-rate or floating-rate, a swap arrangement can be designed to be equivalent to a similar maturity bond.

An interest rate swap

Assume that the swap is for two years and that LIBOR is 5.25 percent in year one and 6.25 percent in year two. What will be the net swap cash flow each year if the notional value of a swap is $100 million?

In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities.

In terms of valuation, a 12-year interest rate swap can be can be considered in terms of

Swap contracts are actively traded on the

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

A US bank has fixed-rate assets in US dollars and variable-rate liabilities in Euros. This bank is exposed to

Which of the following describes the process of "netting" in the swap market?

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

The credit risk on swaps is considered to be

Swaps generally have a shorter maturity than other derivative instruments.

The buyer of an interest rate swap is likely to have a negative duration gap that they would like to reduce.