Question 1

A currency swap is most similar in economic purpose to a&#10;A) basis swap&#10;B) parent company loan&#10;C) debt?equity swap&#10;D) parallel loan

Accepted Answer

A currency swap and a parallel loan both involve two parties exchanging currencies to meet their respective needs, typically to obtain financing in a foreign currency without exposure to foreign exchange rate risk.

Question 2

In a _____ 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.&#10;A) currency&#10;B) interest rate&#10;C) coupoon&#10;D) basis

Accepted Answer

C

Question 3

Suppose a bank charges .8% to arrange the swap and Axil and Bevel split the resulting cost savings. Then Axil will pay ??? for its floating?rate money and Bevel will pay ???? for its fixed?rate money.&#10;A) LIBOR ? .7%; 7.5%&#10;B) LIBOR + .4%; 7.15%&#10;C) LIBOR; 7.45%&#10;D) LIBOR + .5%; 6.75%

Accepted Answer

If Axil pays LIBOR and Bevel pays 7.15%, then the fixed rate is 0.55% greater than the floating rate. Therefore, the bank's fee of 0.8% will result in a cost savings of 0.55%, which will be split between Axil and Bevel. Axil will receive a reduction of 0.275% (half of 0.55%) on its floating-rate money and Bevel will receive a reduction of 0.275% (half of 0.55%) on its fixed-rate money.

Axil's new rate will be LIBOR - 0.275% = LIBOR - 0.00275, and Bevel's new rate will be 7.15% - 0.275% = 6.875%.

Therefore, Axil will pay LIBOR - 0.00275 for its floating-rate money and Bevel will pay 6.875% for its fixed-rate money.

The closest answer choice to these rates is B: LIBOR + 0.4%; 7.15%.

Question 4

A _________ future is a cash-settled futures contract for a three-month $1,000,000 eurodollar deposit that pays LIBOR.&#10;A) forward&#10;B) eurodollar&#10;C) forward rate agreement&#10;D) currency swap

Accepted Answer

The description matches a eurodollar futures contract, which is a type of cash-settled futures contract for a three-month deposit of U.S. dollars held in banks outside the United States (hence, "eurodollar" despite having nothing to do with Europe). The interest rate paid on the deposit is based on the LIBOR (London Interbank Offered Rate) benchmark. Choice A (forward) refers to a different type of contract where two parties agree to exchange an asset (e.g. currency) at a future date and price. Choice C (forward rate agreement) is similar to a forward contract, but instead of agreeing to exchange an asset, the parties agree to a fixed interest rate for a future period. Choice D (currency swap) involves exchanging cash flows in different currencies over time, not simply a deposit paying a LIBOR-based interest rate.

Question 5

Currency swaps are often used to provide long?term financing in foreign currencies because&#10;A) long?term capital markets are not well developed&#10;B) long?term forward foreign exchange markets are absent&#10;C) of high foreign taxes&#10;D) a and b only

Accepted Answer

Currency swaps enable long-term financing in foreign currencies by exchanging the principal and interest payments between the parties. This is often done when long-term capital markets are not well developed or when long-term forward foreign exchange markets are absent. Therefore, options A and B are correct, and option C is not relevant in this context.

Question 6

In a currency swap, the effective interest rate on the money raised is known as the&#10;A) notional principal&#10;B) all-in cost&#10;C) right of offset&#10;D) yield to call

Accepted Answer

In a currency swap, the all-in cost represents the effective interest rate on the money raised, which includes the underlying interest rate and any additional fees or costs associated with the swap. Notional principal refers to the amount of the underlying assets being exchanged, right of offset refers to the ability to offset or cancel out positions in a portfolio, and yield to call refers to the yield earned on a bond if it is called, or redeemed, before maturity.

Question 7

Swaps provide a real economic benefit to the counterparties only if a barrier exists to prevent ______ from functioning fully.&#10;A) hedging&#10;B) factoring&#10;C) arbitrage&#10;D) forfaiting

Accepted Answer

Swaps can be seen as a way to exploit differences in borrowing costs or interest rates that might exist between two parties. If there were no barriers to fully functioning markets, then arbitrage would eliminate these differences, rendering the swap unnecessary. Therefore, swaps provide a real economic benefit to counterparties only if there is a barrier to prevent arbitrage from functioning fully.

Question 8

The economic benefits associated with swaps may derive from&#10;A) legal restrictions on spot and forward foreign exchange transactions&#10;B) different perceptions by investors of risk and creditworthiness of the two parties to the swap&#10;C) appeal or acceptability of one borrower to a certain class of investor&#10;D) all of the above

Accepted Answer

All three options mentioned in the question may contribute to the economic benefits of swaps. A) Legal restrictions on spot and forward foreign exchange transactions may make swaps the advantageous route for foreign exchange transactions. B) Different perceptions of risk and creditworthiness of the two parties involved in the swap may lead to a more favorable pricing of the swap agreement. C) The appeal or acceptability of one borrower to a certain class of investor may result in more favorable terms for the swap. Therefore, option D is the correct choice which covers all the possible benefits associated with swaps.

Question 9

A currency swap is equivalent to a&#10;A) currency option, with the exercise price equal to the current spot rate&#10;B) long?dated forward foreign exchange contract, where the forward rate is the current spot rate.&#10;C) interest rate swap, where the basis is the differential between the fixed and floating interest rates&#10;D) short?term currency futures contract

Accepted Answer

A currency swap is a long?dated forward foreign exchange contract, where the two parties agree to exchange an equal amount of principal and interest payments in different currencies. The forward rate used in the currency swap is typically the current spot rate. Therefore, the correct option is B.

Question 10

An __________ swap is an agreement between two parties to exchange interest payments for a specific maturity in an agreed upon notional amount.&#10;A) interest rate&#10;B) currency&#10;C) bond&#10;D) currency bond

Accepted Answer

An interest rate swap involves exchanging interest payments between two parties based on an agreed upon notional amount. This notional amount is not actually exchanged between the parties, but is just a hypothetical amount used to calculate the interest payments. This type of swap is commonly used to manage interest rate risk and achieve better borrowing rates.

Question 11

How much would X pay for its fixed?rate funds?&#10;A) 9.5%&#10;B) 10.0%&#10;C) 10.5%&#10;D) 10.75%

Accepted Answer

The answer of How much would X pay for its...

Question 12

The theoretical principal underlying the swap is termed the&#10;A) basis amount&#10;B) swap differential&#10;C) notional principal&#10;D) arbitrage principal

Accepted Answer

The answer of The theoretical principal underlying the swap is...

Question 13

In a __________ swaps, two parties exchange floating interest payments based on different reference rates.&#10;A) basis&#10;B) coupon&#10;C) notional&#10;D) forward rate

Accepted Answer

The answer of In a __________ swaps, two parties exchange...

Question 14

________ is a cash-settled, over-the-counter forward contract that allows a company to fix an interest rate to be applied to a specified future interest period on a notional principal amount.&#10;A) interest rate currency swap&#10;B) dual currency bond&#10;C) exchange of principal&#10;D) forward rate agreement

Accepted Answer

The answer of ________ is a cash-settled, over-the-counter forward contract...

Question 15

What is the maximum possible cost savings to Axil from engaging in a currency swap with Bevel?&#10;A) 1%&#10;B) 75%&#10;C) 2%&#10;D) 1.25%

Accepted Answer

The answer of What is the maximum possible cost savings...

Question 16

__________ is a contract that fixes an interest rate today on a future loan or deposit&#10;A) inverse floater&#10;B) step-up&#10;C) step-down&#10;D) forward forward

Accepted Answer

The answer of __________ is a contract that fixes an...

Question 17

If the world capital market were fully integrated, the incentive to swap would be ____ because ____ arbitrage opportunities would exist.&#10;A) increased; more&#10;B) reduced; fewer&#10;C) increased; fewer&#10;D) reduced; more

Accepted Answer

The answer of If the world capital market were fully...

Question 18

Swaps are primarily of value because they permit firms to&#10;A) tap new capital markets&#10;B) reduce risks&#10;C) reduce taxes&#10;D) a and b only

Accepted Answer

The answer of Swaps are primarily of value because they...

Question 19

What is the maximum possible cost savings to Bevel from engaging in a currency swap with Axil?&#10;A) 1%&#10;B) 75%&#10;C) 2%&#10;D) 1.25%

Accepted Answer

The answer of What is the maximum possible cost savings...

Question 20

How much would Y pay for its floating?rate funds?&#10;A) LIBOR ?.25%&#10;B) LIBOR ?.50%&#10;C) LIBOR&#10;D) LIBOR + .5%

Accepted Answer

The answer of How much would Y pay for its...

Question 21

Suppose a U.S. corporation wants to secure fixed?rate funds in pounds in order to reduce its pound exposure, but is hampered in doing so because it is a relatively unknown credit in the British financial market. In contrast, a British company that is well established in its own country may desire floating?rate dollar financing, but is relatively unknown in the U.S. financial market. What is the most appropriate form of swap for these two parties?

A) interest rate/currency swap
B) currency swap
C) interest rate swap
D) debt/equity swap

Accepted Answer

The answer of Suppose a U.S. corporation wants to secure...

Deck 8: Swaps and Interest Rate Derivatives