Management Chapter 24 2 Consider a situation where the duration of the fixed portion of a swap is greater than the floating portion of a swap. Which of the following statements is most correct

57. An FI has purchased an agency security that is an inverse floater at 9 percent minus LIBOR. Which of the

following characteristics reflect this type of asset?

58. An FI has entered a $100 million swap agreement with a counterparty. The fixed-payment portion of the

swap is similar to a government bond with maturity of 6 years and duration of 5 years. The swap payment

interval is 1 year. If the relative shock to interest rates [R/(1+R)] is 50 basis points, what will be the change in

market value of the swap contract?

59. Consider a situation where the duration of the fixed portion of a swap is greater than the floating portion of a

swap. Which of the following statements is most correct?

60. 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?

61. A swap can be effectively hedged against interest rate risk by

62. Which of the following is NOT a reason that a swap may have less credit risk than an individual loan?

63. Swaps create value if

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

interest rate risk exposure?

65. It is common to include

66. When a bank enters into a fixed-floating currency swap, it is exposed to

67. If a US bank has variable-rate assets in US dollars and fixed-rate liabilities in Euros, the bank is exposed to

68. A US bank has fixed-rate assets in US dollars and variable-rate liabilities in Euros. This bank is exposed to

69. A pure credit swap

70. A total return credit swap

71. The credit risk on swaps is considered to be

72. What is replacement risk in the swap market?

74. Which of the following is NOT a reason for the credit risk on a swap to be less than the credit risk on a

loan?

75. Which of the following describes the process of “netting” in the swap market?

76. Which of the following is true of the “netting” process in the swap market?

77. When are the standby letters of credit used in swap agreements?

78. What will be the net after-swap cost of funds for the thrift if the cash market liabilities are included in the

analysis?

79. What will be the net after-swap cost of funds for the bank if the cash market liabilities are included in the

analysis?

80. What will be the net after-swap yield on assets for the thrift?

81. What will be the net after-swap yield on assets for the bank?

82. 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?

83. Assume that the thrift variable-rate liabilities are CDs indexed to some domestic rate. Which of the

following statements describes the hedge characteristics of the above example?

84. What is the forward one-year discount yield expected next year?

85. What are the expected end-of-year profits or losses if the bank hedges its interest rate risk exposure using

the swap?

86. The transaction each year consists of

87. At the end of the year, the exchange rate is €2/$. What are the losses and gains to each bank as a result of

this swap compared to the scenario without the swap?

88. At the end of the year 2, the exchange rate is €1/$. What are the losses and gains to each bank as a result of

this swap? Ignore principal payments and compare it to the scenario where it did not engage in the swap.

89. 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?

90. At the end of year 2, LIBOR rates are 6 percent and the exchange rate is $1.50/.What is the net payment

paid or received in dollars by the U.S. bank?

91. At the end of year 3, LIBOR rates are 6 percent and the exchange rate is $1.10/.What is the net payment

paid or received in dollars by the U.S. bank?

92. What is the nominal payment paid or received by the U.S. bank over the three year period?