Deck 7: Currency Swaps and Swaps Markets

Question 1

Swaps generally do not require a performance bond such as a margin requirement, and this tends to give swaps slightly more default risk than a comparable futures contract.

Answer 1

True

Question 2

A swap is a bundle of end-to-end options in which one option is followed by another upon exercise.

Answer 2

False

Question 3

An interest rate swap is a currency swap in which the principal amounts are in a single currency.

Answer 3

True

Question 4

In an interest rate swap, the principal amount is called notional principal because it is used only to calculate interest payments and is not exchanged.

Question 5

A swap contract identifies the currencies of denomination and the amount and timing of all future cash inflows and outflows.

Question 6

In most countries, currency swaps must be capitalized on the balance sheet.

Question 7

A swap contract releases each party from its obligation should the other party default.

Question 8

Currency swaps have little relation to currency forward contracts.

Question 9

Currency swaps are usually used to hedge short-term currency risks.

Question 10

In an interest rate swap, only the difference check between the interest payments is exchanged when interest payments are due.

Question 11

If one party defaults in a swap, it does not release the other party from its obligation.

Question 12

A currency swap is an agreement to exchange a principal amount of two different currencies and, after a pre-arranged length of time, to re-exchange the original principal.

Question 13

The currency coupon swap is a fixed-for-floating rate non-amortizing currency swap.

Question 14

The majority of the volume in the currency swaps market is conducted on organized exchanges.

Question 15

The market for "plain vanilla" swaps is a low-volume, high-margin business.

Question 16

Currency forwards, futures, options, and swaps are derivative securities that are exposed to currency risk.

Question 17

Default risk in a swap contract is comparable to default risk in a straight debt issue.

Question 18

Growth in the swaps market occurred primarily in the 1970s.

Question 19

Currency coupon swaps are agreements to exchange fixed rate debt in one currency for floating rate debt in another currency.

Question 20

Interest payments are typically exchanged during the life of a swap agreement.

Question 21

A swap with one or more options attached is called a ______.

A) commodity swap
B) coupon swap
C) currency coupon swap
D) debt-for-equity swap
E) swaption

Question 22

Swaps are similar in default risk to straight debt.

Question 23

A fixed-for-floating interest rate swap is called a ______.

A) commodity swap
B) coupon swap
C) currency coupon swap
D) debt-for-equity swap
E) swaption

Question 24

The default risk of a swap contract falls somewhere between the risk of a comparable futures contract and the risk of the forward contract with the longest maturity in the bundle of forward contracts that comprises the swap.

Question 25

A fixed-for-floating nonamortizing currency swap is called a ______.

A) commodity swap
B) coupon swap
C) currency coupon swap
D) debt-for-equity swap
E) swaption

Question 26

A bank's swap portfolio is called its ______.

A) difference check
B) pricing schedule
C) notional principal
D) swap book
E) swap contract

Question 27

Which of a) through d) is NOT TRUE of a swap if the principal amounts are in the same currency?

A) The notional principal is exchanged.
B) The swap is an interest rate swap.
C) The principal amount is used to calculate the interest payments.
D) Only the difference check between the two interest payments is exchanged.
E) All of the above are true.

Question 28

Dealers quote swap prices in a(n) ______.

A) difference check
B) notional principal
C) option contract
D) pricing schedule
E) None of the above