With regard to a swap bank acting as a dealer in swap

89. With regard to a swap bank acting as a dealer in swap transactions, mismatch risk refers to
A. The risk that arises from the situation in which the floating-rates of the two counterparties are
not pegged to the same index.
B. The risk that interest rates changing unfavorably before the sap bank can lay off to an
opposing counterparty on the other side of an interest rate swap entered into with the first
counterparty.
C. The risk the swap bank faces from fluctuating exchange rates during the time it takes for the
bank to lay off a swap it undertakes with one counterparty with an opposing transaction.
D. The risk that it may be difficult or impossible to find an exact opposite match for a swap the
bank has agreed take.
90. You are the debt manager for a U.S.-based multinational. You need to borrow €100,000,000
for five years. You can either borrow the €100,000,000 directly in Germany or borrow dollars in
the U.S. and enter into a combined interest rate and currency swap with a swap bank. One risk
that you face by using the swap that you do not face by borrowing euros directly is:
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Chapter 14 Interest Rate and Currency Swaps
91. Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are
as shown. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR.
In other words, what you be willing to pay in euro against receiving USD LIBOR?
92. Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are
as shown. Develop the 3-year bid price of a dollar swap quoted against flat USD LIBOR.
In other words, what you be willing to pay in euro against receiving USD LIBOR?
93. Suppose that you are a swap bank and you notice that interest rates on coupon bonds are as
shown. Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. The current
spot exchange rate is $1.50 per €1.00. The size of the swap is €40 million versus $60 million.
In other words, what you be willing to pay in euro against receiving USD LIBOR?
A. 7%
B. 6%
C. 5%
D. None of the above
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Chapter 14 Interest Rate and Currency Swaps
Essay Questions
Consider the situation of firm A and firm B. The current exchange rate is $2.00/ ≤ . Firm A is a
U.S. MNC and wants to borrow ≤ 30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have
AAA credit ratings.
The IRP 1-year and 2-year forward exchange rates are
94. Explain how firm A could use two of the swaps offered above to hedge its exchange rate
risk.
95. Explain how firm B could use two of the swaps offered above to hedge its exchange rate
risk.