Sample Quiz 4 Solution

Sample Quiz 4 Solution - Version Fin 536 Sample Quiz 4...

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Version Fin 536 Sample Quiz 4 Solutions Name____________ Section________ Note: You must review all potential topics for the quiz. This sample quiz does not cover all testable topics. Use the following table of swap quotes when you need to. 1. Fill out the answers. a. (Interest rate swap) National Bank has $200b Adjustable Rate Mortgage (ARM) as assets on its balance sheet. The interest rate on the ARM is typically 5%+Libor. The bank is considering hedging risk in the interest income from the ARM with a three-year interest rate swap. The bank should be paying ___ floating _ ___(floating/fixed) rate interest in the swap deal. If the market interest rate (Libor) rises later, the bank has a __loss_ __(loss/gain) in the swap trading. b. (Currency swap) If a company enters a 7-year currency swap on paying 3.4% interest rate on euros and receiving Libor rate on Swiss Francs every 12 months, then the company will ____gain_ ___ (lose/gain) if the interest rate (Libor) on euros increases; will ____gain_ _ (lose/gain) if the interest rate (Libor) on Swiss Francs increases; and will ____lose_ __ (lose/gain) if the euro appreciate against the Swiss Franc, c. A company enters a 5-year interest rate swap on euros, paying Libor rate every 12 months, then the company will receive a fixed rate of _____3.63_ % every 12 months. (Use the swap quotes table) d.
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