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1、Ch014 Interest Rate and Currency SwapsEun & Resnick 4e CHAPTER 14 Interest Rate and Currency Swaps Types of Swaps Size of the Swap Market The Swap Bank International Finance in Practice: The World Banks First Currency Swap Swap Market Quotations Interest Rate Swaps Basic Interest Rate Swap Currency
2、Swaps Basic Currency Swap Variations of Basic Interest Rate and Currency Swaps International Finance in Practice: AIG, Nomura, and IFC Link Up in Latin Swap Transaction Risks of Interest Rate and Currency Swaps Is the Swap Market Efficient? Summary MINI CASE: The Centralia Corporations Currency Swap
3、 Types of Swaps 1 The term interest rate swap a) refers to a single-currency interest rate swap shortened to interest rate swap b) involves counterparties who make a contractual agreement to exchange cash flows at periodic intervals c) can be fixed-for-floating rate or fixed-for-fixed rate d) All of
4、 the above Answer: d) 2 Examples of single-currency interest rate swap and cross-currency interest rate swap are: a) fixed-for-floating rate interest rate swap, where one counterparty exchanges the interest payments of a floating- rate debt obligations for fixed-rate interest payments of the other c
5、ounter party b) fixed-for-fixed rate debt service (currency swap), where one counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counter party denominated in another currency c) a) and b) d) none of the above Answer:
6、 c) Eun/Resnick 4e 166 3 The primary reasons for a counterparty to use a currency swap are: a) to hedge and to speculate b) to play in the futures and forward markets c) to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each c
7、ounterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure d) a) and b) Answer: c) Size of the Swap Market 4 The size of the swap market is a) Measured by notational principal b) Over 7 trillion dollars c) Both a) and b) d) None of the above Answer: c)
8、 The Swap Bank 5 Which combination of the following statements is true about a swap bank? (i)-it is a generic term to describe a financial institution that facilitates swaps between counterparties (ii)- it can be an international commercial bank (iii)- it can be an investment bank (iv)- it can be a
9、merchant bank (v)- it can be an independent operator a) (i) and (ii) b) (i), (ii) and (iii) c) (i), (ii), (iii) and (iv) d) (i), (ii), (iii), (iv) and (v) Answer: d) 6 A swap bank a) Can act as a broker, bringing together counterparties to a swap b) Can act as a dealer, standing ready to buy and sel
10、l swaps c) Both a) and b) d) Only sometimes a) but never ever b) Answer: c) 7 In the swap market, which position carries greater risks, broker or dealer? a) Broker b) Dealer c) They are the same swaps, therefore the same risks. Answer: b) Eun/Resnick 4e 167 Swap Market Quotations 8 Suppose the quote
11、 for a five-year swap with semiannual payments is 8.508.60 percent. The means: a) The swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent against receiving six-month dollar LIBOR. b) The swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent against paying
12、six-month dollar LIBOR. c) a) and b) d) none of the above Answer: c) 9 Suppose the quote for a five-year swap with semiannual payments is 8.508.60 percent. The means: a) The swap bank will pay semiannual fixed-rate dollar payments of 8.60 percent against receiving six-month dollar LIBOR. b) The swap
13、 bank will receive semiannual fixed-rate dollar payments of 8.50 percent against paying six-month dollar LIBOR. c) If the swap bank is successful in getting counterparties to both legs of the swap at these prices, he will have an annual profit of ten basis points. d) none of the above Answer: c) 10
14、XYZ Corporation enters into a 6-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed-rate of 9 percent annually on a notional amount of SF10,000,000 and receive LIBOR percent. As of the third reset date (i.e. mid-way through the 6 year agreement), calculate the pr
15、ice of the swap, assuming that the fixed-rate at which XYZ can borrow has increased to 10%. a) SF248,685 b) SF900,000 c) SF2,700,000 d) SF7,300,000 Answer: a) Rationale: PV of a hypothetical bond issue of SF10,000,000 with three remaining 9 percent coupon payments at the new fixed rate of 10 percent
16、 is SF9,751,314.80 Year 0 Year 1 Year 2 Year 3 0 SF900,000 SF900,000 SF10,900,000 At any reset date, the value of the adjustable rate bond side of this is par value = SF10m. (assuming no change in creditworthiness) Therefore, the price of the swap = SF10,000,000 SF9,751,315 = SF248,685. Eun/Resnick
17、4e 168 11 Suppose the quote for a five-year swap with semiannual payments is 8.508.60 percent in dollars and 6.606.80 percent in euro against six-month dollar LIBOR. The means: a) The swap bank will enter into a currency swap in which it would pay semiannual fixed-rate dollar payments of 8.50 percen
18、t against receiving semiannual fixed-rate euro payments of 6.80. b) The swap bank will enter into a currency swap in which it would pay semiannual fixed-rate euro payments of 6.60 percent against receiving semiannual fixed-rate dollar payments of 8.60. c) a) and b) d) none of the above Answer: c) In
19、terest Rate Swaps 12 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 Answer: d) Basic Interest Rate Swap 13 Company X and company Y have mirror-image fina
20、ncing needs (they both want to borrow equivalent amounts for the same amount of time. Company X has a AAA credit rating, but company Ys 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
21、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) a) and c) Answer: d) 14 A swap bank has identified two companies with mirror-image financing needs (they both w
22、ant 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 s
23、wap bank could just sell the company X side of the swap. c) Company X should lobby Y to get on board d) a) and b) Answer: d) Eun/Resnick 4e 169 15 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 opportuniti
24、es are shown below: Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company X 10% LIBOR Company Y 12% LIBOR + 1.5% A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR 0.15%; in exchange the swap bank will
25、 pay to company X interest payments on $10,000,000 at a fixed rate of 9.90%. What is the value of this swap to company X? a) Company X will lose money on the deal. b) Company X will save 25 basis points per year on $10,000,000 = $25,000 per year. c) Company X will only break even on the deal d) Comp
26、any X will save 5 basis points per year on $10,000,000 = $5,000 per year Answer: d) Rationale: Company X will borrow $10,000,000 at 10% external to the swap (re-read the questionX needs to raise $10,000,000 and prefers to do it at a floating rate). Xs all-in-cost will be: 10% + (LIBOR .15%) 9.90% =
27、LIBOR 0.05%. This represents a savings of 5 basis points over their opportunity to borrow at LIBOR. 16 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: Fixed-Rate Floating-Rate
28、 Borrowing Cost Borrowing Cost Company X 10% LIBOR Company Y 12% LIBOR + 1.5% A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of rate of 9.90%.in exchange the swap bank will pay to company Y interest payments on $10,000
29、,000 at LIBOR 0.15%; What is the value of this swap to company Y? a) Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year. b) Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year. c) Company Y will save 5 basis points per year on $10,000,000 = $5,0
30、00 per year d) Company Y will only break even on the deal Answer: b) Rationale: Company Y will borrow $10,000,000 at LIBOR + 1.5% external to the swap (re-read the questionY needs to raise $10,000,000 and prefers to do it at a fixed rate). Ys all-in cost will be: 9.9% (LIBOR .15%) + LIBOR + 1.5% =11
31、.55%. This represents a savings of 45 basis points over their opportunity to borrow at 12%. Eun/Resnick 4e 170 17 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: Fixed-Rate Fl
32、oating-Rate Borrowing Cost Borrowing Cost Company X 10% LIBOR Company Y 12% LIBOR + 1.5% A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR 0.15%; in exchange the LIBOR .15%SWAP LIBOR .15%XYswap bank will pay t
33、o company X interest BANK9.90%10.30%payments on $10,000,000 at a fixed rate of 9.90%. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR 0.15%. What is the value of this swap to
34、 the swap bank? a) The swap bank will lose money on the deal. b) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. c) The swap bank will break even. d) None of the above Answer: b) Rationale: Add up the all-in-cost to the swap bank: LIBOR .15% LIBOR .15% + 9.90% 10.
35、30% = 0.40%. 10%LIBOR + 1%Eun/Resnick 4e 171 18 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: Fixed-Rate Borrowing Floating-Rate Cost Borrowing Cost Company X 10% LIBOR Comp
36、any Y 12% LIBOR + 1.5% A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR; in exchange SWAP LIBOR .15%LIBOR the swap bank will pay to company X XYBANKinterest payments on $10,000,000 at a 10.05%10.30%fixed rate
37、 of 10.05%. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of LIBOR 0.15%. What is the value of this swap to the swap bank? a) The swap bank will earn 40 basis points per year on $10
38、,000,000 = $40,000 per year. b) The swap bank will earn 10 basis points per year on $10,000,000 = $10,000 per year. c) The swap bank will LOSE money. d) None of the above Answer: a) Rationale: Add up the all-in-cost to the swap bank: LIBOR .15% LIBOR+10.05% 10.30% = 0.40%. Note while we could agree
39、that this question looks remarkably like the last question, my experience is that students have a much harder time with this one. 10%LIBOR + 1%Eun/Resnick 4e 172 19 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 bor
40、rowing opportunities are shown below: Fixed-Rate Borrowing Floating-Rate Cost Borrowing Cost Company X 10% LIBOR Company Y 12% LIBOR + 1.5% A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. SWAP B C Assume both X and Y ag
41、ree to the XYBANKswap banks terms. EDFill in the values for A, B, C, D, E, & F on the diagram. Aa) A = LIBOR; B = 10.45%; C =10.05%; D = LIBOR; E = LIBOR; F = 12% b) A = 10%; B = 10.45%; C =10.05%; D = LIBOR; E = LIBOR; F = LIBOR + 1% c) A = 10%; B = 10.45%; C = LIBOR; D = LIBOR; E = 10.05%; F = LIB
42、OR + 1% d) A = 10%; B = LIBOR; C = LIBOR; D = 10.45%; E = 10.05%; F = LIBOR + 1% Answer: d) Rationale: This is the swap described in the problem: F10%XLIBOR 10.05%SWAP BANKLIBOR10.45%YLIBOR + 1%Eun/Resnick 4e 173 20 Company X wants to borrow $10,000,000 floating for 5 years. Company Y wants to borro
43、w $10,000,000 fixed for 5 years. Their external borrowing opportunities are: Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company X 10% LIBOR Company Y 12% LIBOR + 1.5% Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropri
44、ate values for A = Company Xs external borrowing rate B = Company Ys payment to X (rate) C = Company Xs payment to Y (rate) AD = Company Ys external borrowing rate a) A = 10%; B = 11.75%; B C = LIBOR .25%; D = LIBOR + 1.5% XYb) A = 10%; B = 10%; C C = LIBOR .25%; D = LIBOR + 1.5% c) A = LIBOR; B = 1
45、0%; D C = LIBOR .25%; D = 12% d) A = LIBOR; B = LIBOR; C = LIBOR .25%; D = 12% Answer: b) Rationale: the QSD is %; both X and Y save 25 basis points through the swap. 21 Suppose ABC Investment Banker, Ltd. is quoting swap rates as follows: 7.50 - 7.85 annually against six-month dollar LIBOR for doll
46、ars, and 11.00 - 11.30 percent annually against six-month dollar LIBOR for British pound sterling. ABC would enter into a $/ currency swap in which: a) it would pay annual fixed-rate dollar payments of 7.5% in return for receiving annual fixed-rate payments at 11.3% b) it will receive annual fixed-r
47、ate dollar payments at 7.85% against paying annual fixed-rate payments at 11% c) a) and b) d) none of the above Answer: c) Eun/Resnick 4e 174 22 Use the following information to calculate the quality spread differential (QSD): Fixed-Rate Floating-Rate Borrowing Cost Borrowing Cost Company X 10% LIBOR Company Y 12% LIBOR + 1.5% a) 0.50% b) 1.00% c) 1.50% d) 2.00% Answer: a) Rationale: The QSD = (12% 10%) (LIBOR + 1.5% LIBOR) = 0.50% 23 Company X wants to borrow $10,000,
