Describe who would use a swap and why? How many different types of swaps are they and why? Describe how a company might benefit from interest rate currency swaps?
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Describe who would use a swap and why? How many different types of swaps are they and why? Describe how a company might benefit from interest rate currency swaps?
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- Demonstrate how interest rate and currency swaps are constructed and discuss the comparative advantage argument used to illustrate the popularity of swaps.What types of risks are interest rate andexchange rate swaps designed to mitigate?Why might one company prefer fixed-rate payments while another company prefers floating-ratepayments, or payments in one currency versusanother?Explain what a first-to-default credit default swap is. Does its value increase or decrease as the default correlation between the companies in the basket increases? Explain.
- How can the company use currency futures contracts to hedge against exchange rate risk?Explain carefully how swaps allow firms and banks to separate different types of fixed income risk. What kind of firm would especially like to separate these two risks? What type of risk is this kind of firm likely to want to retain?Which of the following most accurately describes the behavior of credit default swaps?a. When credit risk increases, swap premiums increase.b. When credit and interest rate risk increase, swap premiums increase.c. When credit risk increases, swap premiums increase, but when interest rate risk increases, swap premiums decrease.
