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
