R30 Risk Managment Application Of Swaps

Question 1

How can you convert Floating rate into a Fixed Rate loan

Answer 1

Floating rate can be converted into fixed rate by entering a Payer Swap

Question 2

How can you convert Fixed Rate loan into a Floating Rate loan

Answer 2

Fixed can be converted into floating by entering a Receiver Swap

Question 3

How is duration of Interest Rate Swaps Obtained

Answer 3

Duration of Interest Rate Swaps is the difference between duration of fixed rate bond and duration of the floating rate bond. Duration of Floating rate bonds is close to zero leaving the duration of the swap to be closer to the duration of the fixed rate bond.

Question 4

How can you change the duration of a position without changing its market value

Answer 4

Interest rate swaps can be used to change duration of a position without changing its market value

Question 5

What is a dual currency bond

Answer 5

In a dual currency bond interest is paid in one currency and principal is paid in another currency

Question 6

What are the benefits or uses of Equity Swap

Answer 6

1. Diversification Pay returns of a concentrated position and receive returns of a diversified index.
2. International Diversification pay returns on domestic equity and receive returns on an international equity index.
3. Change asset allocation pay returns on the asset class on which the investor wants to reduce allocation and receive returns on the asset class where one wants to add allocation
4. Company insiders can use swaps to hedge their concentrated positions in company stocks without loosing voting rights.

Question 7

Currency Swap benefits

Answer 7

Can be used to convert loan in one currency to another.
Can be used to reduce cost of borrowing through currency swap instead of a dealer in a foreign country, this method reduces borrowing cost but also exposes the investor to some credit risk.

Question 8

How is Equity swap different from currency and interest rate swaps

Answer 8

Equity swaps can have negative returns meaning a party could have to pay for both sides of the swap if the return on which he had to pay is positive and the return on which he has to receive is negative.

Question 9

long on a call option has what delta (positive/negative) and how do you hedge it

Answer 9

Long call option has positive delta which means if price of the option falls down the value of the option also goes down.
To hedge the positive delta