Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter7:SwapsMultipleChoiceTestBank:QuestionswithAnswers1.AcompanycaninvestfundsforfiveyearsatLIBORminus30basispoints.Thefive-yearswaprateis3%.Whatfixedrateofinterestcanthecompanyearnbyusingtheswap?A.2.4%B.2.7%C.3.0%D.3.3%Answer:BWhenthecompanyinvestsatLIBORminus0.3%andthenentersintoaswapwhereitpaysLIBORandreceives3%itearns2.7%perannum.Notethatitisthebidratethatwillapplytotheswap.2.Whichofthefollowingistrue?A.PrincipalsarenotusuallyexchangedinacurrencyswapB.Theprincipalamountsusuallyflowintheoppositedirectiontointerestpaymentsatthebeginningofacurrencyswapandinthesamedirectionasinterestpaymentsattheendoftheswap.C.Theprincipalamountsusuallyflowinthesamedirectionasinterestpaymentsatthebeginningofacurrencyswapandintheoppositedirectiontointerestpaymentsattheendoftheswap.D.PrincipalsarenotusuallyspecifiedinacurrencyswapAnswer:BThecorrectanswerisB.Therearetwoprincipalsinacurrencyswap,oneforeachcurrency.Theyflowintheoppositedirectiontothecorrespondinginterestpaymentsatthebeginningofthelifeoftheswapandinthesamedirectionasthecorrespondinginterestpaymentsattheendofthelifeoftheswap.3.CompanyXandCompanyYhavebeenofferedthefollowingratesFixedRateFloatingRateCompanyX3.5%3-monthLIBORplus10bpCompanyY4.5%3-monthLIBORplus30bpSupposethatCompanyXborrowsfixedandcompanyYborrowsfloating.Iftheyenterintoaswapwitheachotherwheretheapparentbenefitsaresharedequally,whatiscompanyX’seffectiveborrowingrate?A.3-monthLIBOR−30bpB.3.1%C.3-monthLIBOR−10bpD.3.3%Answer:ATheinterestratedifferentialbetweenthefixedratesis100basispoints.Theinterestratedifferentialbetweenthefloatingratesis20basispoints.Thedifferencebetweentheinterestratesdifferentialsis100–20=80basispoints.Thisisthetotalapparentgainfromtheswaptothetwosides.SincethebenefitsaresharedequallycompanyXshouldbeabletoborrowat40bplessthanitiscurrentlyofferedinthefloatingratemarket,i.e.,atLIBORminus30bp.4.Whichofthefollowingdescribesthefive-yearswaprate?A.Thefixedrateofinterestwhichaswapmarketm...
