Multiple Choice

1. You can think of a swap as all of the following except

a.a pair of stocks.

b.a pair of bonds.

c.a series of forward contracts.

d.a pair of options.

2.You can think of a swap as the combination of a

a.long cap and long floor.

b.long cap and short floor.

c.short cap and short floor.

d.short cap and long floor.

3.The swap price is analogous to

a.the dividend yield on stock.

b.the yield to maturity of a bond.

c.the current yield of a bond.

d.an option premium.

4.You can solve for implied forward rates using a process known as

a.backstrapping.

b.delving.

c.bootstrapping.

d.backwardation.

5.The 3-month spot rate is 5.50%; the 6-month spot rate is 5.75%.  The implied 3f6 forward rate is _______.

a.5.75%

b.5.88%

c.6.00%

d.6.02%

6.In Question 5, suppose the 6-month spot rate increases.  Which of the following is most accurate?

a.The 3-month spot rate will also increase.

b.The 3f6 implied forward rate will also increase.

c.The 3f6 implied forward rate will decrease.

d.The 3-month spot rate will decrease.

7.The two-year spot rate is 5.50%.  A swap dealer quotes a price of 23 bp bid, 26 bp asked.  Someone who wants to pay the fixed rate would pay ___________.

a.5.27%

b.5.50%

c.5.73%

d.5.76%

8.The yield curve is upward sloping.  From the perspective of the fixed rate payer on a newly issued swap,

a.there is little counterparty risk at the front end of the swap.

b.there is little counterparty risk at the back end of the swap.

c.there is substantial counterparty risk throughout the swap.

d.there is no counterparty risk associated with the swap.

9.A swap dealer who wants to hedge a swap obligation might use a  _____ hedge.

a.parallel

b.inverted

c.backwards

d.strip

10.The most common instrument for hedging swaps is

a.caps.

b.floors.

c.Eurodollar futures.

d.T-bill futures.

11.Tailing a hedge involves

a.a time value of money adjustment.

b.a credit risk adjustment.

c.splitting the hedge into two parts.

d.writing an option against the hedge.

12.Which of the following is most accurate?

a.A tailed hedge is larger than an untailed hedge.

b.A tailed hedge lasts longer than an untailed hedge.

c.A tailed hedge is riskier than an untailed hedge.

d.A tailed hedge is smaller than an untailed hedge.

13.Which of the following is most accurate?

a.Principal is exchanged at the beginning of an interest rate swap.

b.Principal is exchanged at the beginning of a foreign currency swap.

c.Principal is exchanged at the beginning of both an interest rate and a foreign currency swap.

d.Principal is not exchanged at the beginning of either an interest rate or a foreign currency swap.

14.A plain vanilla foreign currency swap involves

a.two fixed rates.

b.two floating rates.

c.one fixed rate and one floating rate.

d.A floating rate that is larger than the fixed rate.