Swaps, Forwards, and Future Strategies

Question 1

FOMC

Answer 1

Federal Open market Commitee

Question 2

rate hike - rate cut

Answer 2

fed fund rate range increase / decrease
Eg:
+ Innitial: 1.2% - 1.4%
+ Rate hike: 1.1% - 1.5%
+ Rate cut: 1.25%- 1.35%

Question 3

effective fed fund rate (FFE Rate)

Answer 3

actually rate transact between bank
= (100 - Fed fund future price)

Question 4

fed fund future

Answer 4

futures have underlying is FFE rate in the future

Question 5

cash - settle payer swap

Answer 5

+ not physical
+ receive LIBOR

Question 6

the uses of Swaps, Forwards, Futures strategies

Answer 6

(1) change the beta of an equity portfolio
(2) change the duration of a bond portfolio
(3) change portfolio exposure to various asset classes
(4) create synthetic positions
(5) lock in an interest rate for anticipated future borrowing or lending

Question 7

Payer swap

Answer 7

Pay fixed, received float
+ Has negative duration

Question 8

Receiver swap

Answer 8

Pay float, receive fixed
Synthetic: Receiver swap = FRN + Fixed-rate note

Question 9

How to change from float exposure to fixed exposure

Answer 9

use payer swap

Question 10

conversion factor

Answer 10

reflect its value relative to the notional bond in the contract.
+ are computed as the clean price of $1 face value of the
eligible bond discounted at a yield to maturity of 6%

Question 11

principal invoice price

Answer 11

= (futures settlement price / 100) × $100,000 × CF

Question 12

futures settlement price

Answer 12

is quoted with a par of $100. $100,000 is the face value of Treasury bond futures

Question 13

what short party of bond futures receive

Answer 13

total invoice amount = principal invoice price + accrued interest

Question 14

profit/loss on delivery of bond futures

Answer 14

= [(settlement price × CF) + AIT] − (CTD clean price + AIT)

Question 15

Use Treasury future to hedge interest rate risk

Question 16

FRN

Answer 16

is a bond with a variable interest rate that allows investors to benefit from rising interest rates.

Question 17

cross currency basis la gi ?

Answer 17

+ measure of dollar shortage in the market
+ the more negative the basis becomes, the more severe the shortage

Question 18

currency swap

Answer 18

one party agrees to make periodic interest rate payments on a notional amount in one currency, while the other party agrees to make period interest payments on a notional amount in another currency
The goal of currency swap:
+ hedge against the risk of exchange rate fluctuations
+ achieve better rate outcomes

Question 19

the inception of the swap

Answer 19

the begining of the swap

Question 20

the aim of currency swap

Answer 20

allow to make synthetic borrowing:
+ Borrower: The firm not have good access to capital access in foreign country
+ 3 aim:
(1) effectively borrow in a foreign currency
(2) invest in a foreign asset that will generate foreign currency cash
(3) hedge the currency risk from the foreign-currency cash

Question 21

how basis swap quote

Answer 21

The basis is quoted on the non-USD leg of the swap.

Question 22

Vega notional

Answer 22

+ the average profit and loss of the variance swap for a 1% change in volatility from the strike
+ Eg: when the vega notional is $50,000, the profit and loss for one volatility point of difference between the realized volatility and the strike will be close to $50,000
+ Cách nhớ để tránh nhầm lẫn Vega Notional - Varian Notional: Vega biểu trưng cho sự to lớn -> nên thường lớn hơn

Question 23

Variance notional

Answer 23

= Vega notional / (2 x strike price)

Question 24

the correlation between VIX Index and equity returns ?
A. Negative
B. Positive

Answer 24

A. Negative

Question 25

2 lưu ý trong công thức tính Value của Variance Swap

Answer 25

+ Varian ko quy doi ra % vi Vega Notional is measured for 1% point, not 0.01
+ Discount rate not compound. Eg: annualized: 8% -> 6month = 8% x 6/12 = 4%

Question 26

construction of Variance swap

Answer 26

1. Base:
   + based on variance rather than volatility
   + The fixed payment party: based on implied variance, known at swap initiation
   + The variable payment party: based on realized variance, unknown at swap initiation
2. Settlement amount:
   settlement amount = (variance notional) x (Realized variance - Implied variance)

Question 27

VIX future

Answer 27

can be interpreted as the expected S&P 500 Index volatility in the 30-day
period after the futures contract expiration date.

Question 28

other name of cash equitization

Answer 28

(1) Cash securitization
(2) cash overlay

Question 29

Equity swap construction

Answer 29

(1) Pay total return
(2) Receive floating rate

Question 30

Ben Root holds an interest rate swap with a tenor of one year and quarterly settlement dates. The variable reference rate is LIBOR. The variable payment/receipt on day 270
will be determined by:
A. 270-day LIBOR at initiation.
B. 90-day LIBOR at day 270.
C. 90-day LIBOR at day 180.

Answer 30

C. 90-day LIBOR at day 180.