Explain how a Credit Default Swap is different than a plain vanilla interest rate swap.
Explain how a Credit Default Swap is different than a plain vanilla interest rate swap.
Homework Answers
A credit default swap is used by an investor to offset his default risk. A CDS is used in case investor thinks that borrower may default on repayment. In a CDS contract, buyer of swap agrees to pay a premium to seller of swap till the maturity of contract. Seller of contract in return of premium guarantees the principal and interest payment to the buyer.
Whereas in plain vanilla interest rate swap two parties agrees to pay each other at the specified rate of interest for specified time. one party agrees to pay on fixed rate of interest on predetermined amount to certain period and another party agrees to pay floating rate of interest on same amount and for same period. unlike CDS, in plain vanilla interest rate swap, regular payment is made between both parties for interest amount.
Hence Credit default swap is like an insurance policy, in which buyer pays a certain premium for credit default risk. Outflow of funds is one way from buyer to seller for contact term. Seller only pays is there is credit default.
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Explain how a Credit Default Swap is different than a plain
vanilla interest rate swap.
6. Demonstrate how a plain vanilla interest rate swap can be constructed to be mutually beneficial...
6. Demonstrate how a plain vanilla interest rate swap can be constructed to be mutually beneficial to both parties. Support your analysis with a numerical example.
Consider a plain vanilla fixed for floating interest rate swap with a notional principal of 4,100,000...
Consider a plain vanilla fixed for floating interest rate swap with a notional principal of 4,100,000 and annual payments. Initially the swap was supposed to last for five years and now three years remain. If the initial fixed rate is 0.09, LIBOR is 0.08, and the year three payment was just made (two years of payments remain on the swap), What is the absolute value of the swap?
(11) Explain the working of a "plain vanilla" swap (also called generic swap). Provide an example...
(11) Explain the working of a "plain vanilla" swap (also called generic swap). Provide an example of how both counterparties may benefit by using such an instrument.
Consider the following plain vanilla interest rate swap: Volkswagen borrowed $200mm for four years with annual...
Consider the following plain vanilla interest rate swap:
Volkswagen borrowed $200mm for four years with annual payments at a
floating rate of one-year Libor, but now wants fixed rate
liabilities. The World Bank borrowed $200mm for four years with
annual payments of 6%.
1) If two entered into a plain vanilla interest rate swap with
no exchange at time 0, what would the swap rate be? Use the zero
coupon bond prices implied by the yield curve below (assume
continuous...
Alpha Corporation and Horizon Ltd have decided to go into a plain vanilla interest rate swap,...
Alpha Corporation and Horizon Ltd have decided to go into a plain vanilla interest rate swap, Alpha pays a fixed interest rate of 6% pa while Horizon pays floating rate based on Libor rate. The notional amount is $10 Million. Based on the rates given calculate each payoff on semiannual basis lull '2001 | 54% 341201| 65% jan 12003 | I'Y% 3.4 , | 12%.
Alpha Corporation and Horizon Ltd have decided to go into a plain vanilla interest rate swap,...
Alpha Corporation and Horizon Ltd have decided to go into a plain vanilla interest rate swap, Alpha pays a fixed interest rate of 6% pa while Horizon pays floating rate based on Libor rate. The notional amount is $10 Million. Based on the rates given calculate each payoff on semiannual basis lull '2001 | 54% 341201| 65% jan 12003 | I'Y% 3.4 , | 12%.
Jay enter a plain vanilla swap transaction as a buyer. Assume annual bond CF, the transaction...
Jay enter a plain vanilla swap transaction as a buyer. Assume annual bond CF, the transaction (par value) is $10 Millions, the fixed rate is 6.5% and 1 year later, the LIBOR rate is 6.0%, caculate his net transaction, round to nearest dollar. Enter negative if he pays and postive if he receives.
2) You entered into a plain vanilla swap a while back where you pay 10% per...
2) You entered into a plain vanilla swap a while back where you pay 10% per annum with quarterly compounding on a notional principal of $100,000,000 with payments made quarterly. In exchange, you receive a payment of LIBOR. Your swap has 0.8 years left until its termination date. The LIBOR rate was 14.5% per annum with quarterly compounding when you made your last payment. If today's discount rates are per annum with continuous compounding as followed what is the value...
E9.13 Interest Rate Swap: Profit and Default On July 1, 2020, Queen Corp. and Prince, Inc....
E9.13 Interest Rate Swap: Profit and Default On July 1, 2020, Queen Corp. and Prince, Inc. entered into an interest rate swap on a notional amount of $1 million. They accepted the following offer of Intermediary: To Intermediary from Queen ..... To Intermediary from Prince...... To Queen from Intermediary .... To Prince from Intermediary......... LIBOR + 30 (floating) 2.4% (fixed) 2.3% (fixed) LIBOR + 20 (floating) ........ At inception of the swap, LIBOR = 2.3 percent. Due to an increase...
I need someone to answer me this Qs. Thanks in advance! Explain what credit default swap...
I need someone to answer me this Qs. Thanks in advance!
Explain what credit default swap is and how you could use CDS against government sovereign risk. (10 marks) (b) Based on the diagram below, answer the following questions Fixed rate:7% Company ABC Company XYZ Floating rate: LIBOR+0.5% © What is the swap? (5 marks) (ii) If the notional amount is $3,000,000 and the 1-year LIBOR rate is 6%, what is the net payment? Who is the payer? (10 marks)
6. Demonstrate how a plain vanilla interest rate swap can be constructed to be mutually beneficial to both parties. Support your analysis with a numerical example.
(11) Explain the working of a "plain vanilla" swap (also called generic swap). Provide an example of how both counterparties may benefit by using such an instrument.
Consider the following plain vanilla interest rate swap:
Volkswagen borrowed $200mm for four years with annual payments at a
floating rate of one-year Libor, but now wants fixed rate
liabilities. The World Bank borrowed $200mm for four years with
annual payments of 6%.
1) If two entered into a plain vanilla interest rate swap with
no exchange at time 0, what would the swap rate be? Use the zero
coupon bond prices implied by the yield curve below (assume
continuous...
Alpha Corporation and Horizon Ltd have decided to go into a plain vanilla interest rate swap, Alpha pays a fixed interest rate of 6% pa while Horizon pays floating rate based on Libor rate. The notional amount is $10 Million. Based on the rates given calculate each payoff on semiannual basis lull '2001 | 54% 341201| 65% jan 12003 | I'Y% 3.4 , | 12%.
Alpha Corporation and Horizon Ltd have decided to go into a plain vanilla interest rate swap, Alpha pays a fixed interest rate of 6% pa while Horizon pays floating rate based on Libor rate. The notional amount is $10 Million. Based on the rates given calculate each payoff on semiannual basis lull '2001 | 54% 341201| 65% jan 12003 | I'Y% 3.4 , | 12%.
Jay enter a plain vanilla swap transaction as a buyer. Assume annual bond CF, the transaction (par value) is $10 Millions, the fixed rate is 6.5% and 1 year later, the LIBOR rate is 6.0%, caculate his net transaction, round to nearest dollar. Enter negative if he pays and postive if he receives.
2) You entered into a plain vanilla swap a while back where you pay 10% per annum with quarterly compounding on a notional principal of $100,000,000 with payments made quarterly. In exchange, you receive a payment of LIBOR. Your swap has 0.8 years left until its termination date. The LIBOR rate was 14.5% per annum with quarterly compounding when you made your last payment. If today's discount rates are per annum with continuous compounding as followed what is the value...
E9.13 Interest Rate Swap: Profit and Default On July 1, 2020, Queen Corp. and Prince, Inc. entered into an interest rate swap on a notional amount of $1 million. They accepted the following offer of Intermediary: To Intermediary from Queen ..... To Intermediary from Prince...... To Queen from Intermediary .... To Prince from Intermediary......... LIBOR + 30 (floating) 2.4% (fixed) 2.3% (fixed) LIBOR + 20 (floating) ........ At inception of the swap, LIBOR = 2.3 percent. Due to an increase...
I need someone to answer me this Qs. Thanks in advance!
Explain what credit default swap is and how you could use CDS against government sovereign risk. (10 marks) (b) Based on the diagram below, answer the following questions Fixed rate:7% Company ABC Company XYZ Floating rate: LIBOR+0.5% © What is the swap? (5 marks) (ii) If the notional amount is $3,000,000 and the 1-year LIBOR rate is 6%, what is the net payment? Who is the payer? (10 marks)
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