(CMSA) SWAP FUNDAMENTALS EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS LATEST UPDATE RATED PASS!!!
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Module
CMSA
Institution
CMSA
(CMSA) SWAP FUNDAMENTALS EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS LATEST UPDATE RATED PASS!!!
Define Swap
Is a derivative in which two counterparties exchange cash flows of equal expected values at periodic intervals
*Often one leg is a fixed payment while the other is a floating pay...
Is a derivative in which two counterparties exchange cash flows of equal expected
values at periodic intervals
*Often one leg is a fixed payment while the other is a floating payment
Characteristics of swaps
1. Traded OTC between financial institutions and market makers
2. One of the parties is a swap dealer (Swap Bank) and is usually a large bank
3. The bank offsets a swap through an inter-dealer broker after it executes the swap
4. The NPV of both payment streams must be the same
5. Maturity is usually between 1-5 years
6. Swaps are usually used for hedging, speculating, or managing risk
What are the different types of swaps?
1. Interest Rate Swap
2. Currency Swaps
3. Equity Swaps
4. Basis Swaps
5. Commodity Swap
,Describe the structure of an interest rate swap
An interest rate swap is the exchange of fixed interest payments for floating rate
payments between two parties. Usually one of the parties is a swap dealer (Swap Bank)
*Interest payments are netted, and the party that owes more in interest at a settlement
date makes a payment equal to the difference to the other party
What is the formula for a vanilla interest rate swap?
Net Fixed Rate Payment Made (Received) by Fixed Payer =
[Swap Fixed Rate - (Floating Rate)](#Days/360)Notional Principal
What are the Key Features of an interest rate swap?
Term - Normally 2 and 30 years
Notional Amount - The notional amount is not paid or received but is used to calculate
the cash flows
Payment Frequency - Payments are typically made either quarterly, semi-annually or
annually
Floating Rate - This is normally based on LIBOR & it is used to
reset the swap throughout the swap term thus each floating payment will be different
Fixed Rate - This is set at the beginning of the swap and is also known as the swap rate
Payer/Receiver - In a payer swap you pay the fixed leg and receive the floating leg, and
vice versa for a receiver swap
Describe Long Swap (Buyer)
, You receive LIBOR but pay fixed
Bond Equivalent:
Long float bond & Short fixed bond
Value of Swap (Long) = V(Float) - V(Fixed)
Describe Short Swap (Seller)
You receive fixed but pay LIBOR
Bond Equivalent:
Short float bond & Long fixed bond
Value of Swap (Short) = V(Fixed) - V(Float)
What is the underlying motive behind an interest rate swap?
One party wants greater certainty for their cash flow , while the other looks for
potentially larger returns
(IRS) Interest Rate Swaps can be used to increase or decrease the interest rate
exposure
A portfolio manager making investment decisions for a bond fund will often have a view
on the future direction of interest rate swaps
Which position should you take if you want to increase exposure or decrease?
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