An institution that suffers from declining interest rates may hedge by _____. A. selling interest rate...
An institution that suffers from declining interest rates may hedge by _____.
- A. selling interest rate futures
- B. buying interest rate futures
- C. making fixed-rate payments in exchange for floating-rate payments in an interest rate swap
- D. making floating-rate payments in exchange for fixed-rate payments in an interest rate swap
- E. both (B) and (D)
Homework Answers
rate positively .. let me know if you need any clarification.
correct answer is option E. both (B) and (D)
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An institution that suffers from declining interest rates may
hedge by _____.
A. selling interest rate...
Which of the following is not true for an institution with a positive duration gap? A....
Which of the following is not true for an institution with a positive duration gap? A. It is hurt by increasing interest rates. B. It may hedge its interest rate risk by buying interest rate futures. C. It may hedge its interest rate risk by buying puts on interest rate futures. D. It may hedge its interest rate risk by paying fixed and receiving floating rate in an interest rate swap. E. All of the above are true.
Which of the following statements are true? Select all that apply A Basis spread is the...
Which of the following statements are true? Select all that apply A Basis spread is the rate differential added to the lower of two floating rates in a swap. B The present value of floating rate payments in a swap, at initiation, is always 1. C If you are paying a fixed interest rate and receiving a stock's return in a swap, and the stock's return is negative, you have to pay more than the interest payment to the other...
Explain why an Interest Rate Swap (assume LIBOR as the floating rate) with quarterly settlement (assume...
Explain why an Interest Rate Swap (assume LIBOR as the floating
rate) with quarterly
settlement (assume 90 days per quarter) can be viewed as a strip of
Eurodollar futures
contracts. (Note: A strip is a sequence of ED futures with
successive expirations)
(b) The following table gives the bid and offer fixed rates in the
swap market and the
corresponding swap rates
(i) Suppose that Company X can invest for 4 years at 4.5%.
Recommend a floating
rate, can it...
Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate...
Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate parity exists, do you think hedging with a forward rate would be beneficial if the spot rate of the Mexican peso was expected to decline slightly over time? b. Would hedging with a money market hedge be beneficial if the spot rate of the Mexican peso was expected to decline slightly over time (assume zero transaction costs)? Explain. c. What are some limitations on...
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...
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:...
CB Solutions. Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise,...
CB Solutions. Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating rate interest payments for fixed rates. Presently, she is paying LIBOR plus 2.00% per annum on $5,000,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 4.02% per annum. Heather has just made an interest payment today, so the next payment is due six months from today. Heather finds that she...
Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she...
Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating-rate interest payments for fixed rates. Presently, she is paying LIBORplus2.00% per annum on $ 5 comma 100 comma 000 of debt for the next two years, with payments due semiannually. LIBOR is currently 3.97% per annum. Heather has just made an interest payment today, so the next payment is due six months from now. Heather finds that she...
CB Solutions. Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise,...
CB Solutions. Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating rate interest payments for fixed rates. Presently, she is paying LIBOR plus 2.00% per annum on $5,100,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 4.01% per annum. Heather has just made an interest payment today, so the next payment is due six months from today. Heather finds that she...
Which of the following is a way of valuing interest rate swaps where LIBOR is exchanged...
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Explain why an Interest Rate Swap (assume LIBOR as the floating
rate) with quarterly
settlement (assume 90 days per quarter) can be viewed as a strip of
Eurodollar futures
contracts. (Note: A strip is a sequence of ED futures with
successive expirations)
(b) The following table gives the bid and offer fixed rates in the
swap market and the
corresponding swap rates
(i) Suppose that Company X can invest for 4 years at 4.5%.
Recommend a floating
rate, can it...
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...
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Which of the following is a way of valuing interest rate swaps where LIBOR is exchanged for a fixed rate of interest? Assume that floating payments will equal forward LIBOR rates and discount net cash flows at the risk-free rate Assume that floating payments will equal forward OIS rates and discount net cash flows at the risk-free rate Assume that floating payments will equal forward LIBOR rates and discount net cash flows at the swap rate Assume that floating payments...
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