CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
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Chapter 25, Problem 9CQ
Summary Introduction
To explain: The reason for why swap is effectively a series of forward contracts and nature of risk faced by the both the parties entering in swap agreement.
Interest Rate Swap
Swapping the interest rate helps the companies by allowing them to exchange their interest payments at the decided amount for a mutually agreed period of time. It is done to hedge towards adverse interest rate movements and to get a balance between fixed and variable debt.
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The following statements relate to derivatives. Which of the following is FALSE?a. Swaps may have cashflows as its underlying assets.b. Options allow the buying party to pay a price for a chance to buy or sell the underlying asset .c. Futures are forward commitments.d. Futures and forwards may be contingent claims wherein the contract can be cancelled upon the agreement of both parties.
A swap:
Group of answer choices
B. Gives the holder the right to see the underlying bond.
A. Allows the buyer to purchase the underlying instrument.
C. Is an OTC agreement to exchange the cash flows of two different securities.
D. Not effective at managing interest rate risks.
In a conventional interest rate swap agreement,the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities
true or false
Chapter 25 Solutions
CORPORATE FINANCE CUSTOM W/CONNECT >BI
Ch. 25 - Prob. 1CQCh. 25 - Prob. 2CQCh. 25 - Prob. 3CQCh. 25 - Prob. 4CQCh. 25 - Prob. 5CQCh. 25 - Prob. 6CQCh. 25 - Option Explain why a put option on a bond is...Ch. 25 - Hedging Interest Rates A company has a large bond...Ch. 25 - Prob. 9CQCh. 25 - Prob. 10CQ
Ch. 25 - Prob. 11CQCh. 25 - Prob. 12CQCh. 25 - Prob. 13CQCh. 25 - Prob. 14CQCh. 25 - Hedging Strategies William Santiago is interested...Ch. 25 - Prob. 16CQCh. 25 - Prob. 1QPCh. 25 - Prob. 2QPCh. 25 - Prob. 3QPCh. 25 - Prob. 4QPCh. 25 - Prob. 5QPCh. 25 - Duration What is the duration of a bond with three...Ch. 25 - Duration What is the duration of a bond with four...Ch. 25 - Duration Blue Stool Community Bank has the...Ch. 25 - Prob. 9QPCh. 25 - Prob. 10QPCh. 25 - Prob. 11QPCh. 25 - Prob. 12QPCh. 25 - Prob. 13QPCh. 25 - Forward Pricing You enter into a forward contract...Ch. 25 - Forward Pricing This morning you agreed to buy a...Ch. 25 - Prob. 16QPCh. 25 - What is the monthly mortgage payment on Jerrys...Ch. 25 - Prob. 2MCCh. 25 - Prob. 3MCCh. 25 - Prob. 4MCCh. 25 - Suppose that in the next three months the market...Ch. 25 - Are there any possible risks Jennifer faces in...
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- Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract? a. Forward contracts can be tailored, while future contracts are non-standardized. b. Forward contracts are classified as exotic derivatives. c. Futures contracts are exchange-traded contracts, daily settlements are implemented by the clearing house. d. More flexibility as the buyer can decide whether or not to exercise the contract at maturity. e. For futures contracts, all cash flows are required to be paid at one time on contract maturity.arrow_forwarda)explain the general variables that one must consider when devising a hedge with futures. b)describe the characteristics of plain vanilla interest rate swaps. c)discuss how a pay-fixed, receive-floating swap is equivalent to issuing a fixed-rate bond and purchasing a floating-rate bond. d)explain the importance of valuation of swaps. e) describe basis swap and the process for pricing a basis swap.arrow_forwardWhat is a swap? Describe the mechanics of a fixed-rate swap and a floating-rateswap.arrow_forward
- A contract to sell a bond investment. Entities can buy the contract through an exchange. a.)Long forward contract b.)Variable-to-fixed interest rate swap c.)Short forward contract d.)Currency swap e.)Long futures contract f.)Fixed-to-variable interest rate swap g.)Short futures contractarrow_forwarda) define the following, and discuss the difference between them at origination, before expiration, and at expiration. ◦forward price and the value of a forward contract ◦futures price and the value of a futures contract b) discuss the assumptions under which futures and forward prices can be considered the same. c) describe how to incorporate discrete and continuous dividends into futures contracts on stocks and stock indices. d) explain and discuss the use of interest rate parity in pricing foreign currency forwards and futures. e) describe how spot prices are determined using the cost-of-carry model.arrow_forwardDefine each of the following terms: a. Derivatives b. Enterprise risk management c. Financial futures; forward contract d. Hedging; natural hedge; long hedge; short hedge; perfect hedge; symmetric hedge; asymmetric hedge e. Swap; structured note f. Commodity futuresarrow_forward
- Explain the basic differences between the operation of a currency forward market and a futures market. Then, discuss the main difference in the obligation of one with a long position in futures (or forward) contract in comparison to an options contractarrow_forward(a) Outline in detail what is meant by a forward and futures contract. Evaluate the relationship between futures price and spot price, and give reasons to justify the necessity for exchange margin accounts. (b) Explain the concept of cost of carry model and its role in the pricing of financial futures contracts.arrow_forwardAll of the following are reasons for engaging in swaptions, which one is not? a. Swaptions are utilized by parties who anticipate the need for a swap at a later date but want to lock in a set rate today while keeping the option of not engaging in the swap later or engaging in the swap at a better market rate.b. Swaptions are used by parties entering into a swap to give them the flexibility to terminate the swap.c. Swaptions are used by parties to speculate on interest rates.d. To create a stream of equivalent payments or annuity on the type of swaption.arrow_forward
- "Futures contracts allow individual investors to protect themselves against volatility in interest rates, exchanges rates, commodity prices and share prices" Do you agree with statement ? Explain?arrow_forwardA standard “fixed for floating” interest rate swap contract is effectively a series of call options on the interest rate put options on the interest rate. forward rate agreements. none of the abovearrow_forwardExplain why futures contracts may mitigate the credit risk involved in forward contracts.arrow_forward
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