1. Plain-vanilla interest rate swap.

A British company Britago Corp enters into a 6-month interest rate swap with Baker Bank. The notional principle of the swap is £40 million. Payments will be made quarterly on the basis of 90/360 (90 days in the settlement period and 360 days per year). Britago will receive a fixed rate of 4.2% and pay floating rate Euribor plus 100 basis points (i.e. 1%). The 90-day Euribor rates are as below:

Current 3.5% In 1 quarter 4.1% In 2 quarters 3%

A. Determine the initial exchange of cash that occurs at the start of the swap.

B. Determine the quarterly payments (Q1, Q2).

C. Determine the final exchange of cash that occurs at the end of the swap.

2. Currency swap

Dell Corp. enters into a currency swap with a dealer in which it pays a fixed rate in euros, and the dealer pays a fixed rate in U.S. dollars. The notional principals are $600 million and €500 million (equivalent in value at the current exchange rate of $1.2 per euro.) The fixed rates are 4.2% in dollars and 5% in euros. The swap specifies that the two parties exchange the notional principal at the start and at the end of the swap. Payments are made semiannually on the basis of 180/360.

A. Determine the initial exchange of cash that occurs at the start of the swap.

B. Determine the semiannual payments.

C. Determine the final exchange of cash that occurs at the end of the swap.

3. MC (1.5 pts) Which of the following statement about swaps is least accurate?

A. In a plain vanilla interest rate swap, the notional principal is swapped.

B. The default problem [i.e. default risk] is the most important limitation to the swap market.

C. In a plain vanilla interest rate swap, fixed rates are traded for variable rates.