1. The extreme growth of the swap market has raised concern about the credit risk exposures of banks engaging
in this market.
2. The largest segment of the global swap market is the currency swap market.
3. An interest rate swap is essentially a series of forward contracts on interest rates.
4. In a conventional interest rate swap agreement, the swap buyer agrees to make a number of fixed interest rate
payments to the swap seller.
5. 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.
6. A plain vanilla fixed-floating interest rate swap may involve a third party that acts as a broker, but is not
likely to have any sophisticated special features.
7. Both parties in an interest rate swap normally are fully hedged against interest rate risk on the notional
amount of the swap.
8. One reason for basis risk in an interest rate swap is that changes in the index on the variable rate portion of
the swap may not be perfectly correlated with changes in the index on the cash balance sheet portion of the
liabilities.
9. 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.
10. Whether fixed-rate or floating-rate, a swap arrangement can be designed to be equivalent to a similar
maturity bond.
11. Pricing a fixed-floating rate swap agreement to meet no-arbitrage conditions requires that the expected
present value of the cash flow payments made by the fixed-rate seller should equal the expected value of the
cash flow payments made by the variable-rate buyer.
12. The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously issued
securities.
13. Determining the pricing of a swap agreement requires the calculation of expected one- year rates from the
Treasury yield curve that is accomplished by calculating the spot or zero-coupon discount yield curve.
14. Once a fixed-floating interest rate swap agreement has been negotiated under no-arbitrage conditions, both
parties to the swap agreement know with certainty the exact amount of their respective cash flows.
15. Currency swaps can be designed to reduce foreign exchange risk.
16. The fastest growing group of swaps in recent years has been those designed to help FIs manage interest rate
risk.
17. A total return swap involves exchanging an obligation to pay interest at a specified rate for payments
representing the total return on a loan or a bond of a specified amount.
18. A pure credit swap is similar to buying credit insurance.
19. In a pure credit swap the FI lender makes a payment each period in exchange for the payment of interest in
any period that the borrower defaults on the loan.
20. One reason for the rapid growth of the OTC interest rate and foreign exchange swap markets is that banks
are not required to allocate any capital toward their usage.
21. The notational value of swaps that are held by commercial banks as of 2009 was over $130 trillion.
22. At the end of 2009, the world-wide notational value of swap agreements was less than $400 trillion.
23. When compared to swap and option contracts, credit risk exposure is greatest with a futures contract.
24. By 2008, the insurance company AIG had more than $440 billion in credit default swaps outstanding.
25. In recent years, the fastest growing type of swap agreement has been a fixed-fixed currency swap.
26. Credit risk is more likely to lead to failure of an FI than either interest rate or foreign-exchange risk.
27. A total return credit swap eliminates interest rate risk as well as credit risk.
28. A pure credit swap will reduce interest rate risk.
29. A commercial bank that acts as a swap dealer must include swap risk exposure when calculating risk-based
capital requirements.
30. The secondary market for the trading of swaps is second in liquidity to the U.S. T-bill market.
31. The credit risk on an interest rate swap is generally much less than on an individual loan.
32. Policies established by The International Swaps and Derivatives Association (ISDA) forbid swap contracts
to be made between parties of different credit standing.
33. What is the basic reason that two counterparties enter into a swap agreement?
34. An interest rate swap
35. In terms of valuation, a 12-year interest rate swap can be considered in terms of
36. A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate
increases by entering into
37. Which of the following is an advantage of having swap dealers?
38. A swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities is
39. The type of swap that is in the largest segment of the global swap market is
40. The fastest growing type of swap is
41. In the derivatives markets, the highest transactions costs are highest for
42. In the derivatives markets, the credit risk exposure is greatest for
43. In the derivatives markets, the instrument with the longest potential maturity is
44. Swapping an obligation to pay interest at a specified fixed or floating rate for payments representing the
total return on a loan or a bond of a specified amount is an example of
45. A swap that technically is a succession of forward contracts on interest rates is
46. Which of the following is the primary factor that determines the fixed and floating rates set at the time an
interest rate swap is initiated?
47. The cash flows that actually are paid on an interest rate swap depend on
48. A contract that is a fixed-floating interest rate swap with a third party acting as an intermediary is known as
49. A swap that often involves an up-front fee or payment as compensation for constandard terms is
50. Which of the following is the primary sellers of credit risk protection?
51. By March 2008, the notational value of credit derivative products in the commercial banking industry hit its
peak at approximately $16.44 trillion. In 2009, the notational value of these products was approximately
52. The vast majority of credit derivative contracts held by commercial banks consist of credit
53. Swap contracts are actively traded on the
54. During the most recent financial crisis, the FI segment that was most negatively affected by credit default
swaps was
55. What is the special feature of an off-market swap arrangement?
56. Why were the inverse floaters developed?