Quantitative Work

Question 1

What is a swap

Answer 1

A swap is an agreement between two parties to exchange cash flows in the future

Question 2

What is a forward contract

Answer 2

Simple version of a swap - its the exchange of cash flows on one future date

Question 3

What is a plain vanilla interest rate swap

Answer 3

Involves exchnaging cash flows based on a fixed rate (for one person) and a floating rate (for the other) on the same notional principal for the same time period. Also the currencies are the same.

Question 4

What does LIBOR stand for

Answer 4

London Interbank Offered Rate

Question 5

Different types of Interest Rate Swaps

Answer 5

Amortising – Notional reduces over the life of the
swap

Accreting – Notional increases over the life of the
swap

Rollercoaster – Notional continually changes
Forward start – swap commences on future date

Question 6

for what period is LIBOR usually quoted

Answer 6

1 month, 3 month, 6 month, 12 month

Question 7

How do banks make money Briefly

Answer 7

Through playing the yield curve. They can also use off balance sheet synthetic lending methods - like swaps.

borrow short term (low rates) and lend long term (high rates) which plays the yield curve where the yield curve is normal and upward sloping they can make money.

Problems arise/ have in past when short term funding dries up and theu have no liquidity

Question 8

What are EURIBOR futures and when are they quoted

Answer 8

EU interest rates quoted March, June, September, December

Question 9

When is the last trading day and delivery date of the EURIBOR futures

Answer 9

Last trading day - 2 days before the third wednesday of the month
Delivery date - day future begins and interest is charged 1 day after the trading day

Question 10

What is the basis in the EU

Answer 10

Actual / 360

Question 11

Calculation for the 1 year discount factor of a swap

Answer 11

( 1 / ( 1 + (0.05*365/360 ) )

Question 12

Equation of value to find DF2

Answer 12

[ 1 - (2yr_swap_rate)(365/360) * DF1 ] / [ 1 + (2yr_swap_rate)(365/360) ]

Question 13

What does settlement out of spot mean

Answer 13

Two day ahead

Question 14

What are the interest rate basis for the US and Sterling

Answer 14

sterling- ann/365
US: 30/365

Question 15

What is a Swaption

Answer 15

Swaption (or option on swaps), which provides one party with the right to enter into a certain swap at a certain time in the future.

Question 16

How can you check your discount rate is correct?

Answer 16

Discount*What you get back on deposit (accumulation) = original deposit

Question 17

Dfx Rate

Answer 17

[ 1 - (Xyr_swap_rate)(365/360) * Sum(DF1+..+DF(x-1)) ]
/ [ 1 + (Xyr_swap_rate)(365/360) ]