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Unformatted text preview: imperfect. 2. (Final examination, 2011) (a) Describe each of the following types of swap contract, and identify its associated risks: (i) plain vanilla interest rate swap, and (ii) credit default swap. (b) Two companies, A and B , borrow at different interest rates in US dollars ($) and Sterling (), as follows: Dollar ($) Sterling () interest rate interest rate Company A 9% 7% Company B 4% 5% Assume that the present rate of exchange is $1.5=1, that company A seeks to bor-row $12 million for 10 years and that company B seeks to borrow 8 million, also for 10 years. Interest rates are quoted as per cent, per annum. (i) Construct and explain a currency swap that would be attractive to both companies and to a nancial intermediary that arranges the swap. (ii) Identify the risks associated with the swap. What actions could A , B and the inter-mediary take to mitigate these risks? *****...
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- Spring '12