Deck 8: Swaps

Question 1

Explain a "diff swap" as it relates to currency swaps.

Answer 1

In a diff swap the settlement payments are based on the difference in floating interest rates in two different countries,with the notational amount being a constant in a single currency.

Question 2

Under what circumstances would a multinational company elect to enter into a currency swap agreement?

Answer 2

A firm with exposure to currency risk,via foreign currency denominated debt,may wish to remove this risk.Currency swaps accomplish this goal.

Question 3

Describe briefly the nature of a swap and its primary component.

Answer 3

A swap is an agreement between two parties.The main part is the contractual obligation to exchange some specified cash flows.

Question 4

An investor enters into a 2-year swap agreement to euros at $1.32 per euro.Soon after the swap is created forward prices rise and the new swap price on a similar swap is $1.45.If dollar denominated interest rates are 4.0% and 4.5% on 1- and 2-year zero coupon government bonds,respectively,what is the gain to be made from unwrapping the original swap agreement?

A) $0.24
B) $0.45
C) $0.65
D) $0.82

Question 5

Your company can get yen loans for 2.0%.Dollar rates on the same loans are 4.5%.The spot yen per dollar exchange rate is 104.The forward rates for years 1 thru 4 are,101.51,99.08,96.71,and 94.40,respectively.What is the dollar value of a 4-year 1 million yen loan?

A) $9,615.33
B) $10,422.46
C) $11,618.04
D) $13,527.89

Question 6

What is the 3-year swap price on corn? Assume interest rates over the next 3 years are 2.0%,2.5%,and 2.8%.The prepaid swap price is given as $15.50.

A) $5.10
B) $5.30
C) $5.43
D) $5.64

Question 7

How would a market-maker hedge a swap involving variable price and quantity?

Question 8

Why do arbitrage profits rarely exist in interest rate swap pricing?

Question 9

Euro dollar futures prices with maturities of 3,6,and 9 months are 89.04,88.75,and 88.55,respectively.What is the annualized swap rate on 9-month securities?

A) 8.55%
B) 9.68%
C) 11.34%
D) 13.24%

Question 10

Assume the net swap payment is $.50 on a reverse transaction involving a 3-year oat swap.What is the market value of the swap given interest rates on zero coupon treasury bonds are 5.2%,5.6%,and 6.0% for 1,2,and 3 years,respectively?

A) $0.96
B) $1.10
C) $1.25
D) $1.34

Question 11

An investor enters into a 2-year swap agreement to purchase crude oil at $105.65 per barrel.Soon after the swap is created forward prices rise and the new swap price on a similar swap is $108.32.If interest rates are 3.0% per year,what is the gain to be made from unwrapping the original swap agreement?

A) $2.67
B) $5.11
C) $5.34
D) $5.67

Question 12

IBM and AT&T decide to swap $1 million loans.IBM currently pays 9.0% fixed and AT&T pays 8.5% on a LIBOR + 0.5% loan.What is the net cash flow for IBM if they swap their fixed loan for a LIBOR + 0.5% loan and LIBOR rises to 8.5%?

A) -$50,000
B) $50,000
C) -$90,000
D) 0

Question 13

Assume oat forward prices over the next 3 years are $2.25,$2.35,and $2.28,respectively.Effective annual interest rates over the same period are 5.2%,5.5%,and 5.8%.What is the ?2-year swap price on a hypothetical "forward swap" that begins at the end of year 1?

A) $2.14
B) $2.32
C) $2.41
D) $2.53

Question 14

How does the existence of swaptions add to the possibilities in risk management techniques? While option strategies have not yet been discussed,students should be able to draw conclusions from prior chapters.Lead the class in a discussion of how options lead to an infinite range of possible strategies for swap investors.

Question 15

The 3-year swap price on a new oat swap agreement is $5.94.Interest rates immediately rise on 1,2,and 3-year zero coupon bonds from 5.1%,5.4%,and 5.7% to 5.2%,5.6%,and 6.0%,respectively.What is net swap payment per year if the reverse transaction occurs? Assume year 1,2,and 3 forward prices are $2.05,$2.15,and $2.30,respectively and do not change.

A) $0.35
B) $0.49
C) $0.64
D) $0.75

Question 16

Given zero-coupon bond yields are 2.0%,2.5%,and 2.8% in years 1,2,and 3,respectively,calculate the prepaid swap price for corn.Assume corn forward prices for the proceeding 3 years are $5.00,$5.20,and $5.35,respectively.

A) $14.87
B) $15.04
C) $16.12
D) $16.20

Question 17

A portfolio manager enters into a total return swap.She swaps 50% of her $50 million index based portfolio for 4.5% yield bonds.If the annualized total return on the index is 2.5%,what net cash flow will the manager experience under the swap agreement?

A) + $250,000
B) -$250,000
C) + $500,000
D) -$500,000

Question 18

Assume oat spot prices over the next 3 years are $2.20,$2.35,and $2.28,respectively.The original swap price was $2.30 per bushel.If cash settlement occurs,what transaction will the counter-party make in year 2 on a 5,000-bushel swap agreement?

A) $250 payment
B) $250 receipt
C) $100 payment
D) $100 receipt

Question 19

Your company can get yen loans for 2.0%.Dollar rates on the same loans are 4.5%.The spot yen per dollar exchange rate is 104.The forward rates for years 1 thru 4 are,101.51,99.08,96.71,and 94.40,respectively.What is the present value of the market-maker's net cash flow if spot rates are 102 instead?

A) $188.59
B) $206.43
C) $219.96
D) $242.06

Question 20

The forward prices on a barrel of crude oil are $112 and $118 in years one and two,respectively.The interest rates on zero coupon government bonds are 3.0% and 3.5% in years one and two,respectively.What is the likely 2-year swap price on a barrel of crude oil?

A) $112.00
B) $116.60
C) $118.00
D) $120.50