Question 1

Which of the following is true of the "netting" process in the swap market?

Accepted Answer

A)  It decreases or mitigates the credit risk on swaps.
B)  Both parties make payments to each other as a consequence.
C)  It implies that the default exposure of the in-the-money party is the total fixed or floating payment.
D)  It does not happen across contracts.
E)  Netting by novation increases the potential risk of loss.F) C) and E)
G) None of the above

Question 2

Bank Canada has fixed-rate assets of $50 million funded by fixed-rate liabilities of 75 million Euros paying an interest rate of 10 percent annually. Bank Dresdner has fixed-rate assets of €75 million funded by fixed-rate liabilities of $50 million paying an interest rate of 10 percent annually. The current exchange rate is €1.50/$. They agree to swap interest payments on their liabilities to hedge against currency risk exposure for two years. The transaction each year consists of

Accepted Answer

A)  Bank Canada swaps a payment of $5 million per year for Bank Dresdner's payment of €7.5 million to make interest payments on each other's debt.
B)  Bank Canada swaps a payment of €6 million per year for Bank Dresdner's payment of $4 million to make interest payments on each other's debt.
C)  Bank Canada swaps a payment of $6 million per year for Bank Dresdner's payment of €6 million to make interest payments on each other's debt.
D)  Bank Canada swaps a payment of €6 million per year for Bank Dresdner's payment of $6 million to make interest payments on each other's debt.
E)  Bank Canada swaps a payment of $4 million per year for Bank Dresdner's payment of €4 million to make interest payments on each other's debt.F) A) and B)
G) A) and C)

Question 3

The credit risk on swaps is considered to be

Accepted Answer

A)  more than the credit risk on loans.
B)  less than the credit risk on loans.
C)  same as the credit risk on loans.
D)  is negligible compared to the credit risk on loans.
E)  less likely to cause an FI to fail than is interest rate risk.F) A) and D)
G) B) and E)

Question 4

A credit union has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2)  percent. A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent. The bank's variable-rate assets earn LIBOR + 1 (L + 1)  percent. The credit union and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR. Assume that the credit union variable-rate liabilities are CDs indexed to some domestic rate. Which of the following statements describes the hedge characteristics of the above example?

Accepted Answer

A)  The credit union is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates.
B)  Only the bank is fully hedged.
C)  The credit union is exposed to basis risk if the credit/default risk premium on the thrift's CDs increases over time.
D)  All of these.
E)  The credit union is exposed to basis risk because the CD rates may not be perfectly correlated with the LIBOR rates, and the credit union is exposed to basis risk if the credit/default risk premium on the thrift's CDs increases over time.F) A) and C)
G) None of the above

Question 5

It is common to include

Accepted Answer

A)  both the interest and principal payments in an interest rate swap.
B)  only the interest payments in a currency swap.
C)  both the interest and principal payments in a currency swap.
D)  only the principal payments in an interest rate swap.
E)  only the principal payments in a currency swap.F) None of the above
G) C) and E)

Question 6

The fastest growing type of swap is

Accepted Answer

A)  a commodity swap.
B)  a credit swap.
C)  a currency swap.
D)  an equity swap.
E)  an interest rate swap.F) C) and E)
G) A) and E)

Question 7

One reason for basis risk in an interest rate swap is that changes in the index on the variable rate portion of the swap may not be perfectly correlated with changes in the index on the balance sheet portion of the liabilities.

Accepted Answer

A) True 
 B)False

Question 8

In terms of valuation, a 12-year interest rate swap can be can be considered in terms of

Accepted Answer

A)  a series of option contracts.
B)  a zero-coupon bond.
C)  a U.S. Treasury STRIP.
D)  bond-equivalent valuation.
E)  securitization of a derivative contract.F) B) and D)
G) None of the above

Question 9

Once a fixed-floating interest rate swap agreement has been negotiated under no-arbitrage conditions, both parties to the swap agreement know with certainty the exact amount of their respective cash flows.

Accepted Answer

A) True 
 B)False

Question 10

A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into

Accepted Answer

A)  a currency swap agreement to receive the fixed rate payment.
B)  an interest rate swap agreement to make the fixed-rate payment side of the swap.
C)  a credit swap agreement to receive the floating rate payment.
D)  a commodity swap agreement to make the fixed-rate payment side of the swap.
E)  an equity swap agreement to make the floating-rate payment side of the swap.F) A) and C)
G) C) and E)

Question 11

A swap that often involves an up-front fee or payment as compensation for nonstandard terms is

Accepted Answer

A)  a pure credit swap.
B)  a total return swap.
C)  an off-market swap.
D)  a plain vanilla swap.
E)  an interest rate swap.F) A) and C)
G) B) and C)

Question 12

In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities.

Accepted Answer

A) True 
 B)False

Question 13

Swaps create value if

Accepted Answer

A)  relative prices differ across markets.
B)  there are barriers to entry in some markets.
C)  information is costly.
D)  All of these.
E)  None of these.F) A) and B)
G) A) and C)

Question 14

The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously issued securities.

Accepted Answer

A) True 
 B)False

Question 15

What is the basic reason that two counterparties enter into a swap agreement?

Accepted Answer

A)  Exchange of one specified cash flow in the future based on some underlying index.
B)  Better management of credit risk by using a fixed or floating rate bond as hedging instrument.
C)  To restructure or off-set the expected future cash flows to be collected from assets or liabilities held on the balance sheet.
D)  Exchange of assets for a specific period of time at a specified interval.
E)  Taking the opposite side of each transaction in order to keep the swap market liquid.F) None of the above
G) B) and D)

Exam 24: Swaps

The credit risk on swaps is considered to be

Correct Answer
verified

Which of the following is true of the "netting" process in the swap market?

Correct Answer
verified

Correct Answer
verified

In terms of valuation, a 12-year interest rate swap can be can be considered in terms of

Correct Answer
verified

The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously issued securities.

Correct Answer
verified

What is the basic reason that two counterparties enter into a swap agreement?

Correct Answer
verified

Correct Answer
verified

Swaps create value if

Correct Answer
verified

One reason for basis risk in an interest rate swap is that changes in the index on the variable rate portion of the swap may not be perfectly correlated with changes in the index on the balance sheet portion of the liabilities.

Correct Answer
verified

In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities.

Correct Answer
verified

A swap that often involves an up-front fee or payment as compensation for nonstandard terms is

Correct Answer
verified

A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into

Correct Answer
verified

Once a fixed-floating interest rate swap agreement has been negotiated under no-arbitrage conditions, both parties to the swap agreement know with certainty the exact amount of their respective cash flows.

Correct Answer
verified

It is common to include

Correct Answer
verified

The fastest growing type of swap is

Correct Answer
verified

Exam 24: Swaps

The credit risk on swaps is considered to be

Correct AnswerverifiedShow Answer

Which of the following is true of the "netting" process in the swap market?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In terms of valuation, a 12-year interest rate swap can be can be considered in terms of

Correct AnswerverifiedShow Answer

The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously issued securities.

Correct AnswerverifiedShow Answer

What is the basic reason that two counterparties enter into a swap agreement?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Swaps create value if

Correct AnswerverifiedShow Answer

One reason for basis risk in an interest rate swap is that changes in the index on the variable rate portion of the swap may not be perfectly correlated with changes in the index on the balance sheet portion of the liabilities.

Correct AnswerverifiedShow Answer

In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities.

Correct AnswerverifiedShow Answer

A swap that often involves an up-front fee or payment as compensation for nonstandard terms is

Correct AnswerverifiedShow Answer

A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into

Correct AnswerverifiedShow Answer

Once a fixed-floating interest rate swap agreement has been negotiated under no-arbitrage conditions, both parties to the swap agreement know with certainty the exact amount of their respective cash flows.

Correct AnswerverifiedShow Answer

It is common to include

Correct AnswerverifiedShow Answer

The fastest growing type of swap is

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified