“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are...
“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are the companies that are most likely to be paying fixed and receiving floating in an interest rate swap.” Assume that this statement is true. Do you think it increases or decreases the risk of a financial institution’s swap portfolio? Assume that companies are most likely to default when interest rates are high.
Homework Answers
Assuming that companies are most likely to default when interest rates are high we can say that the risk of a financial institution’s swap portfolio will decrease. It should be noted that there is a time lag between interest rates being high and the default that takes place as a result of this high interest rates. So in reality when the default does actually happen the interest rates may be relatively low.
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“Companies with high credit risks are the ones that cannot
access fixed-rate markets directly. They are...
“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are the companies th...
“Companies with high credit risks are the ones that cannot access fixed-rate markets directly. They are the companies that are most likely to be paying fixed and receiving floating in an interest rate swap.” Assume that this statement is true. Do you think it increases or decreases the risk of a financial institution’s swap portfolio? Assume that companies are most likely to default when interest rates are high.
Problem 7.12.* Companies A and B face the following interest rates (adjusted for the differential impact...
Problem 7.12.* Companies A and B face the following interest rates (adjusted for the differential impact of taxes): US Dollars (floating rate) Canadian dollars (fixed rate) LIBOR+0.5% 5.0% LIBOR+1.0% 6.5% Assume that A wants to borrow U.S. dollars at a floating rate of interest and B wants to borrow Canadian dollars at a fixed rate of interest. A financial institution is planning to arrange a swap and requires a 50-basis-point spread. If the swap is equally attractive to A and...
6. Find the upcoming interest payments in a currency swap in which party A pays U.S. dollars at a fixed rate of 5 perce...
6. Find the upcoming interest payments in a currency swap in which party A pays U.S. dollars at a fixed rate of 5 percent p.a. on a notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4 percent p.a. on a notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year, and there is no netting. A. party A pays $2,500,000, and party B pays SF1,400,000...
a) ABC Ltd is interested to sell an existing fixed-for-floating interest rate swap to one of...
a) ABC Ltd is interested to sell an existing fixed-for-floating interest rate swap to one of its corporate clients. Under the existing swap, ABC Ltd pays 10% pa and receive 3-month LIBOR on a $10 million principal. Cash flows are exchanged every quarter. The swap has a remaining life of 16 months. Data shows that the 3-month LIBOR rate 1 month ago was 11.8% pa; 2 months’ ago it was 12% pa; 3 months’ ago it was 12.2% pa and...
This problem illustrates how to [1] determine the payments of an interest rate swap, [2] value...
This problem illustrates how to [1] determine the payments of an interest rate swap, [2] value the swap, [3] and hedge with the swap. The problem is based on the WSJ article “School District, Bank in Swap clash”. The setting: The local school district was planning to build a new high school. The estimated cost of the building was around $100M. To finance the building the school district needed to issue a bond for about $58M. It had two choices:...
5. Interest rate parity Aa Aa The rise of globalization is due to the many companies that have become multinational cor...
5. Interest rate parity Aa Aa The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well-for example, political risk and exchange rate risk. Several factors affect the exchange rate of a currency with...
MINI CASE Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc....
MINI CASE Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc. (TS), a mid-sized Tennessee company that specializes in creating exotic sauces from imported fruits and vegetables. The firm's CEO, Bill Stooksbury, recently returned from an industry corporate executive conference in San Francisco, and one of the sessions he attended was on the pressing need for companies to institute enterprise risk management programs Because no one atTennessee Sunshine is familiar with the basics of enterprise...
Module 9 – Foreign Exchange Rate Risk Homework Exercise Part 1 1. Suppose that the EUR:USD...
Module 9 – Foreign Exchange Rate Risk Homework Exercise Part 1 1. Suppose that the EUR:USD is trading at 1.3342; the GBP:JPY is trading at 67.7600; and the EUR:GBP is trading at 0.8165. What should the USD:JPY rate be? 2. If a price index for US goods stands at 118.93 and the same price index for European goods (i.e., computed from the same consumption basket) stands at 183.34; what is the fair (under the theory of PPP) spot exchange rate...
available until you sign in again A high rate of inflation is likely to cause a...
available until you sign in again A high rate of inflation is likely to cause a Multiple Cholce low rate of growth of nominal GDP decrease in nominal wages. high nominal interest rate. low nominal interest rate. Next> Prev 45 of 50 available until you sign in again In a private closed economy, national income is $4.5 trillion and saving equals $6.4 billion. Based on these data, the marginal propensity to consume Multiple Choice is greater than the marginal propensity...
Problem 7.12.* Companies A and B face the following interest rates (adjusted for the differential impact of taxes): US Dollars (floating rate) Canadian dollars (fixed rate) LIBOR+0.5% 5.0% LIBOR+1.0% 6.5% Assume that A wants to borrow U.S. dollars at a floating rate of interest and B wants to borrow Canadian dollars at a fixed rate of interest. A financial institution is planning to arrange a swap and requires a 50-basis-point spread. If the swap is equally attractive to A and...
6. Find the upcoming interest payments in a currency swap in which party A pays U.S. dollars at a fixed rate of 5 percent p.a. on a notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4 percent p.a. on a notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year, and there is no netting. A. party A pays $2,500,000, and party B pays SF1,400,000...
5. Interest rate parity Aa Aa The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well-for example, political risk and exchange rate risk. Several factors affect the exchange rate of a currency with...
MINI CASE Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc. (TS), a mid-sized Tennessee company that specializes in creating exotic sauces from imported fruits and vegetables. The firm's CEO, Bill Stooksbury, recently returned from an industry corporate executive conference in San Francisco, and one of the sessions he attended was on the pressing need for companies to institute enterprise risk management programs Because no one atTennessee Sunshine is familiar with the basics of enterprise...
available until you sign in again A high rate of inflation is likely to cause a Multiple Cholce low rate of growth of nominal GDP decrease in nominal wages. high nominal interest rate. low nominal interest rate. Next> Prev 45 of 50 available until you sign in again In a private closed economy, national income is $4.5 trillion and saving equals $6.4 billion. Based on these data, the marginal propensity to consume Multiple Choice is greater than the marginal propensity...
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