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Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. Assume company Y has agreed,but company X will only agree to the swap if the bank offers better terms. What are the absolute best terms the bank can offer X,given that it already booked Y? A) 10.45%-10.45% against LIBOR flat. B) 10.45%-10.05% against LIBOR flat. C) 10.50%-10.50% against LIBOR flat D) none of the above A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. Assume company Y has agreed,but company X will only agree to the swap if the bank offers better terms. What are the absolute best terms the bank can offer X,given that it already booked Y? Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. Assume company Y has agreed,but company X will only agree to the swap if the bank offers better terms. What are the absolute best terms the bank can offer X,given that it already booked Y? A) 10.45%-10.45% against LIBOR flat. B) 10.45%-10.05% against LIBOR flat. C) 10.50%-10.50% against LIBOR flat D) none of the above


A) 10.45%-10.45% against LIBOR flat.
B) 10.45%-10.05% against LIBOR flat.
C) 10.50%-10.50% against LIBOR flat
D) none of the above Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. Assume company Y has agreed,but company X will only agree to the swap if the bank offers better terms. What are the absolute best terms the bank can offer X,given that it already booked Y? A) 10.45%-10.45% against LIBOR flat. B) 10.45%-10.05% against LIBOR flat. C) 10.50%-10.50% against LIBOR flat D) none of the above

E) B) and C)
F) A) and D)

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A

In a currency swap


A) it may be the case that two counterparties have equivalent credit ratings.
B) it may be the case that firms have a comparative advantage in borrowing in their domestic markets.
C) both a) and b)
D) none of the above

E) A) and B)
F) None of the above

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Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk.

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Firm B could agree to a swap at the poun...

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Floating for floating currency swaps


A) the reference rates are different for the different currencies: e.g.dollar LIBOR versus euro LIBOR.
B) the reference rates can be the same but have different frequencies.
C) both a) and b)
D) none of the above

E) None of the above
F) B) and C)

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In an efficient market without barriers to capital flows,the cost-savings argument of the QSD is difficult to accept,because


A) it implies that an arbitrage opportunity exists because of some mispricing of the default risk premiums on different types of debt instruments.
B) it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on different maturities of forward contracts.
C) none of the above

D) A) and C)
E) All of the above

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Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow £5,000,000 fixed for 5 years.The exchange rate is $2 = £1 and is not expected to change over the next 5 years.Their external borrowing opportunities are: Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow £5,000,000 fixed for 5 years.The exchange rate is $2 = £1 and is not expected to change over the next 5 years.Their external borrowing opportunities are: A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap.In order for X and Y to be interested,they can face no exchange rate risk What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y? A) A = $10.50%; B = £12%. B) A = $10%; B = £13%. C) A = $12%; B = £13%. D) A = £10.50%; B = $12%. A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap.In order for X and Y to be interested,they can face no exchange rate risk Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow £5,000,000 fixed for 5 years.The exchange rate is $2 = £1 and is not expected to change over the next 5 years.Their external borrowing opportunities are: A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap.In order for X and Y to be interested,they can face no exchange rate risk What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y? A) A = $10.50%; B = £12%. B) A = $10%; B = £13%. C) A = $12%; B = £13%. D) A = £10.50%; B = $12%. What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y?


A) A = $10.50%; B = £12%.
B) A = $10%; B = £13%.
C) A = $12%; B = £13%.
D) A = £10.50%; B = $12%.

E) A) and B)
F) B) and D)

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A major that can be eliminated through a swap is exchange rate risk.


A) But only to the extent that a foreign counterparty will NOT default in a currency swap.
B) But only if the bid-ask spreads are wide.
C) But swaps can be less efficient in this than just trading at the expected spot exchange rates each year.
D) None of the above

E) B) and D)
F) B) and C)

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A

A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has agreed to one leg of the swap but company Y is "playing hard to get".


A) If the swap bank has already contracted one leg of the swap, they should be anxious to offer better terms to company Y to just get the deal done.
B) The swap bank could just sell the company X side of the swap.
C) Company X should lobby Y to "get on board".
D) Both a) and b)

E) A) and B)
F) None of the above

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D

An interest-only single currency interest rate swap


A) is also known as a plain vanilla swap.
B) is also known as an interest rate swap.
C) is about as simple as swaps can get.
D) all of the above

E) None of the above
F) B) and C)

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Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 7% USD loan into a 2-year euro denominated loan.

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Firm A could borrow $60m today and excha...

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Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has a AAA credit rating,but company Y's credit standing is considerably lower.


A) Company X should demand most of the QSD in any swap with Y as compensation for default risk.
B) Since Y has a poor credit rating, it would not be a participant in the swap market.
C) Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation.
D) both a) and c)

E) All of the above
F) B) and D)

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Consider the dollar- and euro-based borrowing opportunities of companies A and B . Consider the dollar- and euro-based borrowing opportunities of companies A and B . A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as: .Suppose they agree to the swap shown at right.Is this mutually beneficial swap equally fair to both parties? A) Yes, QSD = [€7% - €6% * $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% B) No, company A borrows at 6% in euro but company B borrows at 8% in dollars C) Yes, A will be better off by €1% on €1m; B by 1% on $2m and $2.00 = €1.00 D) No, company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as: Consider the dollar- and euro-based borrowing opportunities of companies A and B . A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as: .Suppose they agree to the swap shown at right.Is this mutually beneficial swap equally fair to both parties? A) Yes, QSD = [€7% - €6% * $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% B) No, company A borrows at 6% in euro but company B borrows at 8% in dollars C) Yes, A will be better off by €1% on €1m; B by 1% on $2m and $2.00 = €1.00 D) No, company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B .Suppose they agree to the swap shown at right.Is this mutually beneficial swap equally fair to both parties? Consider the dollar- and euro-based borrowing opportunities of companies A and B . A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as: .Suppose they agree to the swap shown at right.Is this mutually beneficial swap equally fair to both parties? A) Yes, QSD = [€7% - €6% * $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% B) No, company A borrows at 6% in euro but company B borrows at 8% in dollars C) Yes, A will be better off by €1% on €1m; B by 1% on $2m and $2.00 = €1.00 D) No, company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B


A) Yes, QSD = [€7% - €6% * $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3%
B) No, company A borrows at 6% in euro but company B borrows at 8% in dollars
C) Yes, A will be better off by €1% on €1m; B by 1% on $2m and $2.00 = €1.00
D) No, company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B

E) C) and D)
F) A) and D)

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Explain how firm B could use the forward exchange markets to redenominate a 2-year €40m 5% euro loan into a 2-year USD-denominated loan.

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Firm B could borrow €40m today and excha...

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What would be the interest rate?

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The IRR on a £30m lo...

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Pricing a currency swap after inception involves


A) finding the difference between the present values of the payments streams the party will receive in one currency and pay in the other currency, converted to a common currency.
B) sending a market order to a swap dealer.
C) finding the sum of the present values of the payments streams that each party will receive in one currency and pay in the other currency, converted to a common currency.
D) none of the above

E) B) and C)
F) A) and B)

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Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided. Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

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When an interest-only swap is established on an amortizing basis


A) the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized.
B) the debt service exchanges are the same each year, but the level of interest and principal changes as the loans amortize.
C) there is no such thing as an amortizing interest-only swap.
D) none of the above

E) None of the above
F) A) and C)

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When a swap bank serves as a broker:


A) The swap bank stands willing to accept either side of a swap.
B) The swap bank matches counterparties but does not assume any risk of the swap.
C) The swap bank receives a commission for matching buyers and sellers.
D) None of the above

E) A) and B)
F) A) and C)

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Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and promise to make at least 20bp for your firm. Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and promise to make at least 20bp for your firm.

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Show how your proposed swap would work for firm A.(e.g.if you were acting as an agent for the swap bank,try to "sell" firm A on your swap) I would point out that his contracting costs would be less with just having 1 swap instead of 2 forward contracts.Also,he might be able to get a better rate through the swap if he can't find forward contracts at his desired maturity and amounts.

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I would point out that his contracting c...

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