4) If a financial manager with an interest liability on a future date were to sell Futures and
interest rates end up going up, the position outcome would be:
A) Futures price falls; short earns a profit.
B) Futures price rises; short earns a loss.
C) Future price falls; long earns a loss.
D) Futures price rises; long earns a profit.
5) If a financial manager with an interest liability on a future date were to sell Futures and
interest rates end up going down, the position outcome would be:
A) Futures price falls; short earns a profit.
B) Futures price rises; short earns a loss.
C) Future price falls; long earns a loss.
D) Futures price rises; long earns a profit.
6) If a financial manager earning interest on a future date were to buy Futures and interest rates
end up going up, the position outcome would be:
A) Futures price falls; short earns a profit.
B) Futures price rises; short earns a loss.
C) Future price falls; long earns a loss.
D) Futures price rises; long earns a profit.
7) If a financial manager earning interest on a future date were to buy Futures and interest rates
end up going down, the position outcome would be:
A) Futures price falls; short earns a profit.
B) Futures price rises; short earns a loss.
C) Future price falls; long earns a loss.
D) Futures price rises; long earns a profit.
8) Interest rate futures are relatively unpopular among financial managers because of their
relative illiquidity and their difficulty of use.
9) A basis point is one-tenth of one percent.
10) Your firm is faced with paying a variable rate debt obligation with the expectation that
interest rates are likely to go up. Identify two strategies using interest rate futures and interest
rate swaps that could reduce the risk to the firm.
8.4 Interest Rate Derivatives
1) An agreement to swap a fixed interest payment for a floating interest payment would be
considered a/an:
A) currency swap.
B) forward swap.
C) interest rate swap.
D) none of the above
2) An agreement to exchange interest payments based on a fixed payment for those based on a
variable rate (or vice versa) is known as a/an:
A) forward rate agreement.
B) interest rate future.
C) interest rate swap.
D) none of the above
3) An agreement to swap the currencies of a debt service obligation would be termed a/an:
A) currency swap.
B) forward swap.
C) interest rate swap.
D) none of the above
4) Which of the following would be considered an example of a currency swap?
A) exchanging a dollar interest obligation for a British pound obligation
B) exchanging a eurodollar interest obligation for a dollar obligation
C) exchanging a eurodollar interest obligation for a British pound obligation
D) All of the above are examples of a currency swap.
5) A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement
to:
A) pay fixed-rate interest and receive floating rate interest.
B) pay floating rate and receive fixed rate.
C) pay fixed rate and receive fixed rate.
D) pay floating rate and receive floating rate.
6) A firm with variable-rate debt that expects interest rates to rise may engage in a swap
agreement to:
A) pay fixed-rate interest and receive floating rate interest.
B) pay floating rate and receive fixed rate.
C) pay fixed rate and receive fixed rate.
D) pay floating rate and receive floating rate.
7) The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is
to:
A) do nothing.
B) pay floating and receive fixed.
C) receive floating and pay fixed.
D) none of the above
8) Which of the following is an unlikely reason for firms to participate in the swap market?
A) To replace cash flows scheduled in an undesired currency with cash flows in a desired
currency.
B) Firms may raise capital in one currency but desire to repay it in another currency.
C) Firms desire to swap fixed and variable payment or receipt of funds.
D) All of the above are likely reasons for a firm to enter the swap market.
9) A swap agreement may involve currencies or interest rates, but never both.
10) One of the reasons companies use interest rate swaps is because they pursue a target debt
structure that combines maturity, currency of composition, and fixed/floating pricing.
11) One of the reasons companies use interest rate swaps is because they are interested in
opportunities to lower the cost of their debt.
12) Your firm is faced with paying a variable rate debt obligation with the expectation that
interest rates are likely to go up. Identify two strategies using interest rate futures and interest
rate swaps that could reduce the risk to the firm.
1) The potential exposure that any individual firm bears that the second party to any financial
contract will be unable to fulfill its obligations under the contract is called:
A) interest rate risk.
B) credit risk.
C) counterparty risk.
D) clearinghouse risk.
2) Counterparty risk is greater for exchange-traded derivatives than for over-the-counter
derivatives.
3) Swap rates are derived from the yield curves in each major currency.
4) A firm entering into a currency or interest rate swap agreement holds no responsibility for the
timely servicing of its own debt obligations since that responsibility now is born by the second
party to the contract.
5) The real exposure of an interest or currency swap is not the total notional principal, but the
mark-to-market values of differentials in interest or currency interest payments since the
inception of the swap agreement.
6) How does counterparty risk influence a firm’s decision to trade exchange-traded derivatives
rather than over-the-counter derivatives?