Swaps

Question 1

In an interest rate swap the principal .. … ……………

Answer 1

is not exchanged

Question 2

In a currency swap the principal is usually exchanged .. … …………. …. …. … ….. ….

Answer 2

at the beginning and the end of the swap’s life

Question 3

Typical uses of a currency swap:

Answer 3

• Convert a liability in one currency into a liability in another currency
• Convert an investment in one currency into an investment inanother currency
• Motivations can be comparative advantage or exchange rate expectations

Question 4

Swaps Market is ….

Answer 4

Huge

Question 5

An interest rate swap is a swap where interest at a predetermined fixed rate, applied to a certain principal, is exchanged for interest at a …….. reference rate, applied to the …. principal, with regular exchanges being made for an agreed period of time

Answer 5

floating / same

Question 6

An OIS is an agreement to exchange a fixed rate of interestfor a reference rate of interest that is calculated from realised ………. rates

Answer 6

overnight

Question 7

The fixed rate that is exchanged for floating is referred to as the … rate

Answer 7

OIS

Question 8

Why would a company swap their floating rate liability (payment) to a fixed rate one?

Answer 8

If it believes that rates are about to go up it may want to lock-in a fixed rate now to prevent its borrowing costs from increasing.

• Another theoretical possibility is that Apple has a comparative advantage in floating rate borrowing but prefers to borrow at a fixed rate. So, it borrows at SOFR and enters a swap to pay fixed.