EXCH16 - PRACTICE PROBLEMS CHAPTER 16: SWAPS Exercise 16.1:...

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PRACTICE PROBLEMS CHAPTER 16: SWAPS Exercise 16.1: Companies A and B have been offered the following rates per annum on a $20 million five-year loan: Fixed Rate Floating Rate Company A 12.0% LIBOR + 0.1% Company B 13.4% LIBOR + 0.6% Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will net a bank acting as intermediary 0.1 percent per annum and be equally attractive to both companies. Write the swap in such a way that the floating rate is LIBOR; e.g. for each firm you’ll write Firm X pays (or receives) LIBOR to (from) the financial intermediary in exchange for __%. Exercise 16.2: Companies X and Y have been offered the following rates per annum on a $5 million ten-year loan: Fixed Rate Floating Rate Company X 7.0% LIBOR + 0.5% Company Y 8.8% LIBOR + 1.5% Company X requires a floating-rate loan; company Y requires a fixed-rate loan. Design a swap that will net a bank acting as intermediary 0.2 percent per annum and be equally attractive to both companies. Write the swap in such a way that the floating rate is LIBOR. Exercise 16.3: Explain the difference between the credit risk and the market risk in a financial contract. Can these risks be hedged? Exercise 16.4: Explain why a bank is subject to credit risk when it enters into two offsetting swap contracts. (You can think of the bank as being the financial intermediary here.) Exercise 16.5: Under the terms of an interest-rate swap, a financial institution has agreed to pay 10 percent per annum compounded quarterly and to receive three- month LIBOR in return on a notional principal of $100 million with payments being exchanged every three months. The swap has a remaining life of 14 months. The current LIBOR rate is 12 percent per annum (compounded quarterly) for all maturities. The three-month LIBOR rate one month ago was 11.8 percent per annum (compounded quarterly). What is the value of the swap?
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This note was uploaded on 04/11/2011 for the course FINS 5536 taught by Professor No during the Three '11 term at University of New South Wales.

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EXCH16 - PRACTICE PROBLEMS CHAPTER 16: SWAPS Exercise 16.1:...

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