Swap Markets And Contracts

Question 0

Diff between pricing and valuing swaps

Answer 0

Price at initiation = 0
Value after initiation is zero sum
Ie positive value to one is negative value to other

Question 1

Pricing of plain vanilla is fixed rate that makes ________ equal _______

Answer 1

PV of fixed rate payments

PV of floating rate payments

Question 2

Calc Value of a swap

Answer 2

PV of payments received - PV of payments made

Question 3

What bond transaction equals plain vanilla interest swap

Answer 3

Issue fixed coupon bond
Invest proceeds in floating rate bond

Same params

Question 4

What transaction equals equity swap

Answer 4

Borrowing at fixed rate

Investing in stock/port/index

Question 5

What transaction equals currency swap

Answer 5

Issuing bond in currency
Exchanging proceeds for another currency at spot exchange
Purchasing bond denominated in other currency

Same params

Question 6

How to price plain vanilla int rate swap

Answer 6

Use combo of issued fixed rate and buying floating w/same initial value

Question 7

Calc fixed periodic rate on N period swap at initiation

Answer 7

Cn = 1-Zn
—————
Z1+Z2+…+Zn

Zn = PV $1 received on nth payment date

Question 8

Calc mkt value of vanilla swap

Answer 8

Value of replicating floating rate bond - Value of fixed rate bond

Question 9

Value floating rate between payments

Answer 9

Fixed rate value = PV of floating - PV of fixed

Floating rate value = PV of fixed - PV of floating

Question 10

How to price a currency swap

Answer 10

Same method - use replicating bonds in both currencies but with two term structures and two swap rates

Question 11

Difference between valuing a currency swap and plain vanilla swap

Answer 11

Must deal with exchange rate between two currencies that changes over time

Question 12

Value an equity swap using…

Answer 12

Same process as plain vanilla
Notional amount * (1+% appreciation )
Use difference in values to value swap

Question 13

Types of credit risk associated with swaps

Answer 13

Current credit risk (payment due now)

Potential credit risk (future credit risk remaining over life; greatest in middle /after middle for currency)

Question 14

Ways of reducing credit risk

Answer 14

Netting

Marking to market

Question 15

Payer swaption

Answer 15

Right to enter swap at future date as fixed rate payer

If fixed rates increase, option valuable

Question 16

Value of payer swaption

Answer 16

At expiration: PV strike for swap fixed - PV new higher rate
Zero if lower rate

Question 17

Receiver swaption

Answer 17

Right to enter swap at date as floating payer

If rates decrease, more valuable

Question 18

Value of receiver swaption

Answer 18

At expiration: PV swap fixed payments on higher strike and lower existing rate

Or zero if higher existing rate

Question 19

Use swaptions to

Answer 19

Hedge expected fixed or floating exposure
Speculate int rate direction
Exiting swap prior to normal termination

Question 20

Swap spread

Answer 20

Swap rate - comparable maturity T-notes