Derivatives

an Australian stock paying no dividend is trading in australian dollars for 63.31... forward price

$65.05

a stock paying no dividends interest rate at 4.75%, (risk-free rate) with annual compounding, what should the one-year forward price be at equilibrium

$66.32

If the notional principal on an interest rate swap is $100 million, and LIBOR for the prior period is 5%, and the floating rate payer has agreed to pay LIBOR +1.25%, the annual floating rate payment due is:

$6.25 Million

Libor stands for

London interbank offered rate

as interest rate rises the market value of a bond

declines (inverse relationship)

An Australian stock paying no dividends is trading in Australian dollars $63.31 interest rate is 2.75 the risk-free rate with annual compound, the interest rate falls 50 bps, 3 month forward price would be

decrease (higher the interest rate, the higher the forward price is)

2 fundamental rules for arbitrage

do not use your own money, do not take any price risk

a floating for fixed interest rate swap typically involves

effectively the conversion of a floating rate loan to a fixed rate loan

if a borrower with a floating rate loan is worries about intest rate rising they migh

enter into a floating rate swap

what type of swap normally includes the exchange of notional principal in addition to an exchange of cash flows

Currency Rate Swap

An equity swap has a $50 million notional principal, and the floating rate payer agrees to pay at an annual rate of LIBOR + 1.00%, and LIBOR for the prior period was 4%, if the stock index swapped drops by 3%, the floating rate payer's net cash flow is :

-$4,000,000

the 3 year interest rate that resets annually based on 1 year LIBOR the settlement will use the 1 year libot rate asof

0

a FRA 2x7 of the TOTAL TIE PERIOD

210 days 2x30= 60 days+ 5X30=150

FRA are quoted based on

360 days

A company's weighted average cost of capital (WACC) is 10% and the cost of a swap is LIBOR + 1% and LIBOR for the prior period is 3%, if the company utilizes a swap to hedge its exposure versus using their own capital, they can lower their hedging cost by:

6%

An Australian stock Australianinterest rate 2.75, risk free rate, no arbitrage

63.74 (63.31(1.0275)/4

The notional principal for a currency swap is always greater than the notion principal of an interest rate swap.

FAlse

When LIBOR is used to calculate interest payments, you use the current LIBOR rate to calculate the current interest payment due.

False

Swap Contracts are traded on public exchanges

False (OTC)

If a company has a fixed rate loan , but thinks interest rates are going lower they may want to convert that fixed rate loan via a swap with

Floating rate payments in exchange for fixed rate payments.

A swap bank's role in a swap transaction is to bring the counter parties together so that both counter parties achieve an advantage by entering into the swap.

True

A swap that exchanges the cash flows associated with the returns from a stock index for a fixed or floating rate based cash flow is called an equity swap.

True

if we observe the dividends, price to be higher than the equilibrium price determined by the carry arbitrage model then,

a carry arbitrage opp. exists and the market forward price is too high and the forward contract should be sold

we observe the market forward price to be lower than the equilibrium price determined by the carry arbitrage model.

a reverse carry arbitrage opp. exists

interest rate swap is

an agreement between 2 parties exchange net interest rate payments based on the notional principal

A forward rate agreement (FRA)

an agreement between 2 parties to receive or pay an amount of ties to a specific interest rate scenario at a specific point in the future

a floating rate loan with

an interest rate that adjusts as oppose as a fixed rat

what swap changes payments

currency swap

Going long on a stock involves

buying the stock and hoping the price goes up in the future (long means buy)

Risk free rate is used to determine

forward equilibrium price

a reverse carry abritrage

forward price is BELOW market equilibrium

a stock no , interest rate immediately increases, forward price will:

increase

Company rates at AAA will be able to borrow at a ____ rate than company BBB

lower

the FRA quotes 3 (first three months) x6 (FRA) length of the loan means:

maturity of the contract Isi 90 days (6-3)

selling short a stock involves

selling the stock today and then buying the stock back at a later time, hopefully at a lower price

notional value in derivatives are

the amount used to calculate derivative values and /or payments

notional principle as it relates to a swap is

the amount used to calculate swap payments between counterparties

Carry arbitrage (cash and carry) strategy is indicated when

the forward price is higher than the market suggested an equilibrium