Deck 21: Interest Rates and Foreign Currency Swaps

Question 1

Most parallel loans include a ________ clause that requires additional advances or repayments of principal under special conditions.

A) notional principal
B) topping-up
C) right of offset
D) yield to call

Answer 1

B

Question 2

A currency swap is equivalent to a

A) currency option, with the exercise price equal to the current spot rate.
B) longdated forward foreign exchange contract, where the forward rate is the current spot rate.
C) interest rate swap, where the basis is the differential between the fixed and floating interest rates.
D) short-term currency futures contract.

Answer 2

B

Question 3

A currency swap is most similar in economic purpose to a

A) basis swap.
B) parent company loan.
C) debt equity swap.
D) parallel loan.

Answer 3

D

Question 4

A currency swaps allows a multinational corporation to change the ________.

A) currency of denomination of its debts
B) forward rate on contracts it secures to hedge exchange rate risk
C) principal and interest rate on its debt
D) nature of its debt from a fixed interest rate to a floating interest rate

Question 5

The nature of swap contracts is usually based on the best practices suggested by the ________,

A) Options Clearing Corporation
B) Chicago Board Options Exchange
C) International Swap and Derivatives Association
D) Securities Exchange Commission

Question 6

The ________ is the conceptual principal amount that controls the cash flows of an interest rate swap.

A) notional principal
B) all-in cost
C) right of offset
D) yield to call

Question 7

What is the name of the clause in a back-to-back loan that stipulates that if one party defaults on a payment,the other party can withhold corresponding payments?

A) right of offset
B) topping-off
C) all-in-cost
D) with-recourse

Question 8

If the world capital market were fully integrated,the incentive to swap would be ________ because ________ arbitrage opportunities would exist.

A) increased; more
B) reduced; fewer
C) increased; fewer
D) reduced; more

Question 9

A(n)________ allows a multinational corporation to change the currency of denomination of its debts.

A) interest rate swap
B) currency swap
C) currency option contract
D) currency future contract

Question 10

In a(n)________ swap,one party pays a fixed rate calculated at the time of the trade as a spread to a particular Treasury bond,and the other sides pays a floating rate.

A) currency
B) interest rate
C) coupon
D) basis

Question 11

In a(n)________ swap,one party pays a fixed rate calculated at the time off trade as a spread to a particular Treasury bond,and the other sides pays a floating rate.

A) currency
B) interest rate
C) coupon
D) basis

Question 12

Between 2001 and 2004 the phenomenal growth in the use of swap markets has been a rate of over ________ per year.

A) 100%
B) 80%
C) 50%
D) 33%

Question 13

The ________ is the conceptual principal amount that controls the cash flows of an interest ate swap.

A) synthetic principal
B) notional principal
C) nominal principal
D) discounted principal

Question 14

________ is the number of basis points that are added to the yield to maturity on a U.S.government bond corresponding to that maturity.

A) Swap spread
B) Interest-rate spread
C) Bid-ask spread
D) The bank spread

Question 15

The theoretical principal underlying the swap is termed the

A) basis amount.
B) swap differential.
C) notional principal.
D) arbitrage principal.

Question 16

The ________ is the amount of basis points added to the yield to maturity on a government bond corresponding to that maturity to get the fixed interest rate of an interest rate swap.

A) swap spread
B) all-in cost
C) right of offset
D) yield to call

Question 17

The principal amount of the currencies in a currency swap is determined by ________ between the two parties to the swap.

A) the notional principal
B) negotiation
C) the right of offset
D) the yield to call

Question 18

The ________ is a trade organization that offers controls on the legal aspects of swaps.

A) Options Clearing Corporation
B) Chicago Board Options Exchange
C) Securities Exchange Commission
D) International Swap and Derivatives Association

Question 19

Swaps provide a real economic benefit to the counterparties only if a barrier exists to prevent ________ from functioning fully.

A) hedging
B) factoring
C) arbitrage
D) forfaiting

Question 20

An interest rate swap allows an MNC to change the nature of its debt from a ________.

A) fixed interest rate to a floating interest rate
B) local bank interest charge to a international bank interest charge
C) pegged currency exchange system to a floating currency exchange system
D) debt security to an equity security

Question 21

Describe how the cash flows of swaps are similar in structure to the cash flow of bonds.

Question 22

Suppose Ace International Company decides at t+18 to use a six-month contract to hedge the t + 24 receipt of yen from Kensui Incorporated.Six-month interest rates (annualized)at t + 18 are 5.9% in dollars and 2.1% in yen.The 6 month forward rate at time t + 18 is ¥128.58.With this hedge in place,what fixed dollar amount would Ace have paid and received at time t + 24?

Question 23

Swaps are primarily of value because they permit firms to

A) tap new capital markets.
B) reduce risks.
C) reduce taxes.
D) both A and B

Question 24

Currency swaps are often used to provide long-term financing in foreign currencies because

A) longterm capital markets are not well developed.
B) longterm forward foreign exchange markets are absent.
C) of high foreign taxes.
D) both A and B

Question 25

Which one of the following statements is most accurate about financial markets that provide swaps today?

A) No longer are corporations tied to the financial markets of their country of residence.
B) Banks do not like swaps because the associated cash flows are just like those of bonds.
C) The result is that some companies have more difficulty is issuing debt in one currency that in other currencies.
D) Because the cash flows of swaps are not like the cash flows of bonds, banks find it easy to offset their exposures in long-term forward contracts.

Question 26

Suppose Siemens Corporation would like to borrow fixed-rate yen and can borrow them at 4.5% or floating-rate dollars at LIBOR + 0.25%.The Singapore Development Bank would like to borrow floating-rate dollars and can borrow fixed-rate yen at 4.9% or floating-rate dollars at LIBOR + 0.8%.What is the range of possible cost savings that Siemens can realize through an interest rate/currency swap with Singapore?

Question 27

When a situation exists in which two corporations have headquarters in two different countries and each makes a loan of equivalent value to the subsidiary of the other company that operates in its country,we say ________ exists.

A) a lagging accounts receivable payment
B) a parallel loan
C) the right of offset
D) a back-to-back loan

Question 28

A currency swap is equivalent to a

A) currency option, with the exercise price equal to the current spot rate.
B) longdated forward foreign exchange contract, where the forward rate is the current spot rate.
C) interest rate swap, where the basis is the differential between the fixed and floating interest rates.
D) short term currency futures contract.

Question 29

Describe how a back-to-back loan is used.

Question 30

What are some factors that underlie the economic benefits of swaps?

Question 31

Why are swap market transactions costs lower than transaction costs in the long term forward market?