SGS 11 (Derivatives)

Question 1

What is the purpose of a hedging arrangement?

Answer 1

limit or offset potential losses arising from fluctuations in bank interest and currency exchange rates.

Question 2

What is an interest rate swap?

Answer 2

Parties hedge respective interest rate exposure by entering into swap (payments set off and one party makes payment to the other)

Question 3

What type of parties would benefit from an interest rate swap?

Answer 3

one paying floating rate interest but receiving fixed rental rates

another receiving floating rate but paying fixed interest rates.

Question 4

What is the process for hedging against currency exchange rate fluctuations?

Answer 4

currency swap allows two borrowers to borrow in domestic currencies and swap loan amounts and interest commitments to allow each to get required foreign currency at advantageous interest rate.

Question 5

Example of a practical use of currency swap?

Answer 5

Group located in several jurisdictions
income in domestic currency so group has several exchange rate exposures
hedge put in place to ensure it does not suffer downsize of change in rates (currency swap)