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Exam 24: Swaps

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Question 1

Multiple Choice

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

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

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B

Question 2

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The party in a swap that receives fixed-rate payments will always have zero basis risk since the fixed-rate swap payments can be structured to cover the fixed-rate liability payments.

A) True
B) False

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Question 3

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The Wall Street Reform and Consumer Protection Act of 2010 established comprehensive regulation of over-the-counter (OTC)derivatives including swaps.

A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years.One-year maturity notes are currently priced at par and are paying 4.5 percent annually.Two-year maturity notes are currently priced at par and are paying 5 percent annually.The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield. What is the forward one-year discount yield expected next year?

An interest rate swap

A thrift 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 thrift 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 swap is for two years and that LIBOR is 5.25 percent in year one and 6.25 percent in year two.What will be the net swap cash flow each year if the notional value of a swap is $100 million?

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.

A U.S.bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million.The current exchange rate is $1.50/£.The interest payments will be exchanged at the end of the year at the prevailing rates. At the end of the year,LIBOR is 4 percent and the exchange rate is $1.50/£.What is the net payment paid or received in dollars by the U.S.bank?

What is the special feature of an off-market swap arrangement?

What kind of interest rate swap (of liabilities) would an FI with a positive funding gap utilize to hedge interest rate risk exposure?

The vast majority of credit derivative contracts held by commercial banks consist of credit

A bank has assets of $500,000,000 and equity of $40,000,000.The assets have an average duration of 5.5 years,and the liabilities have an average duration of 2.5 years.An 8-year fixed-rate T-bond with the same coupon as the fixed-rate on the swap has a duration of 6 years,and the duration of a floating-rate bond that reprices annually is one year.The bank wishes to hedge its balance sheet with swap contracts that have notional contracts of $100,000.What is the optimal number of swap contracts into which the bank should enter?

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

In the derivatives markets,the instrument with the longest potential maturity is

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

The largest segment of the global swap market is the currency swap market.

The Commodity Futures Trading Commission (CFTC)has jurisdiction over swaps.

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

Swap transactions are homogeneous in nature so that the contracts can be easily traded in the secondary market for swaps.

Most swap agreements are negotiated privately without the use of an intermediary.