Deck 7: Swaps

Question 1

The 200-day BBSW zero rate is 3.58% with continuous compounding, and the forward rate from a 90-day bank accepted bill futures quote for a period of 90 days starting in 200 days is 4.25% with continuous compounding. Determine the 290-day zero rate continuously compounded). Answer as a per cent with two decimal places. _ _ _ _ _ _ _ _

Answer 1

3.79%.

Question 2

Suppose that the yield curve is flat at 5% per annum with continuous compounding. A swap with a notional principal of $100 million, in which 6% per annum is received and six-month BBSW is paid, will last for another 15 months. Payments are exchanged every six months. The six-month BBSW rate at the last reset date three months ago) was 7% per annum semi-annual compounding). Answer in millions of dollars to two decimal places.
i) What is the value of the fixed-rate bond underlying the swap? _ _ _ _ _ _
ii) What is the value of the floating-rate bond underlying the swap? _ _ _ _ _ _
iii) What is the value of the payment that will be exchanged in 3 months? _ _ _ _ _ _
iv) What is the value of the payment that will be exchanged in 9 months? _ _ _ _ _ _
v) What is the value of the payment that will be exchanged in 15 months? _ _ _ _ _ _
vi) What is the value of the swap? _ _ _ _ _ _

Answer 2

i): 102.61
ii): 102.21
iii): -0.49
iv): 0.45
v): 0.44
vi): 0.40

Question 3

A company can invest funds for five years at BBSW minus 30 basis points. The five-year swap rate is 3%. What fixed rate of interest can the company earn? Ignore day count issues.) _ _ _ _ _ _

Answer 3

2.7%

Question 4

Suppose you enter into an interest rate swap where you are receiving floating and paying fixed. Which two of the following is true? choose two)

A) Your credit risk is greater when the term structure is upward sloping than when it is downward sloping.
B) Your credit risk is greater when the term structure is downward sloping than when it is upward sloping.
C) Your credit risk exposure increases when interest rates decline unexpectedly.
D) Your credit risk exposure increases when interest rates increase unexpectedly.

Question 5

Which of the following is true? choose one)

A) Principals are not usually exchanged in a currency swap.
B) The principal amounts usually flow in the opposite direction to interest payments at the beginning of a currency swap, and in the same direction as interest payments at the end of the swap.
C) The principal amounts usually flow in the same direction as interest payments at the beginning of a currency swap, and in the opposite direction to interest payments at the end of the swap.
D) Principals are not usually specified in a currency swap.