DERIVATIVES QUIZ 8

A plain vanilla swap usually involves:

• Swapping debt maturities

• Swapping fixed rate payments for floating rate payments

• Swapping interest rate tax liabilities

• Swapping debt principal payments

Swaps are mainly used to reduce ______ risk

• Counterparty

• Market

• Country

• Operational

The most important use for swaps is for

• Hedging

• Speculation

• Switching views or positions

• Note of the above

Interest swaps is equal to:

• Arithmetic average of forward rates

• Geometric average of forward rates

• Weighted average of forward rates

• None of the above

Usually, interest rate swaps are done

• Between the counterparties

• Between government regulatory agencies

• Under the supervision of the World Bank

• By financial institutions

Companies X and Y have been offered the following rates per annum:

Company X: Fixed rate of 8% or floating rate equal to LIBOR

Company Y: Fixed rate of 8.8% or floating rate equal to LIBOR

Company Y requires a fixed-rate investment; company X requires a floating-rate investment.

In case they both enter a swap agreement based on their preferences, what is the maximum total gain of both parties (3 min):

• 0.8%

• 0.8% - intermediation fees

• 0.4% – (intermediation fees / 2)

• None of the above