A
. Firm A does 2 swaps with the swap bank, $ at bid and € at ask. Firm B does 2 swaps with the swap bank, $ at ask and € at bid. Firms A and B would each save 90bp and the swap bank would earn 20bp.
B. There is no mutually beneficial swap at these prices.
C
29. 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 $2.00 × (1.08)/€1.00 × (1.06) =
$2.0377/€1.
Is there a mutually beneficial swap?
A. No, QSD = 0
30. Pricing an interest-only single currency swap after inception involves A. sending a market order to a swap dealer.
B. finding the difference between the present values of the payments streams the party will receive and pay.
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
Eun - Chapter 14 #30 Topic: Currency Swaps
31. 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 proposes the following interest-only swap: Company X will pay the swap bank annual payments on $10,000,000 at an interest rate of $9.80%; in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed rate of 10.5%. Y will pay the swap bank interest payments on £5,000,000 at a fixed rate of 12.80% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of 12%.
If company X takes on the swap, what external actions should they engage in?
A. They should borrow $10,000,000 at $10%.
B.They should borrow £5,000,000 at 10.50% interest-only for five years; translate pounds to dollars at the spot rate.
C .
They should borrow £5,000,000 at £10.50% interest-only for five years; translate pounds to dollars at the spot rate; enter long position in a forward contract to buy £5,000,000 in five years.
D. None of the above
Eun - Chapter 14 #31 Topic: Currency Swaps
32. 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%.
Eun - Chapter 14 #32 Topic: Currency Swaps
33. 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
Eun - Chapter 14 #33 Topic: Currency Swaps
34. Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow £5,000,000 fixed for 1 year. The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as
$2.00 × (1.08)/£1.00 × (1.06) = $2.0377/£1. 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 = £7%; B = $9%.
B. A = $8%; B = £6%.
C. A = $7%; B = £7%.
D. A = $8%; B = £8%.
Eun - Chapter 14 #34 Topic: Currency Swaps
35. In the problem just previous, company X A. is probably British.
B. is probably American.
C. has a comparative advantage in borrowing pounds.
D. both a and c
Eun - Chapter 14 #35 Topic: Currency Swaps
36. 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
Eun - Chapter 14 #36 Topic: Currency Swaps
37. Compute the payments due in the second year on a three-year AMORTIZING swap from company B to company A. Company A and company B both want to borrow £1,000,000 for three years. A wants to borrow floating and B wants to borrow fixed. A and B agree to split the QSD.
A. B pays £402,114.80 to A
B. B pays £100,000 to A C. B pays £69,788.52 to A D. None of the above
Eun - Chapter 14 #37 Topic: Variations of Basic Interest Rate and Currency Swaps
38. 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
Eun - Chapter 14 #38 Topic: Variations of Basic Interest Rate and Currency Swaps
39. Floating for floating currency swaps
A. the reference rates are different for the different currencies: e.g. dollar LIBOR versus euro LIBOR.
B. do not exist.
C. offer the swap bank a built-in hedge.
D. none of the above
Eun - Chapter 14 #39 Topic: Variations of Basic Interest Rate and Currency Swaps
40. Compute the payments due in the FIRST year on a three-year AMORTIZING swap from company B to company A. Company A and company B both want to borrow £1,000,000 for three years. A wants to borrow floating and B wants to borrow fixed. A and B agree to split the QSD.
A. B pays £402,114.80 to A
B. B pays £100,000 to A C. B pays £69,788.52 to A D. None of the above
Eun - Chapter 14 #40 Topic: Variations of Basic Interest Rate and Currency Swaps
41. In an interest-only currency swap