CFA Level 2 – Derivative Investments, Session 17-Reading 63
Swap Markets and Contracts-LOS b
(Practice Questions, Sample Questions)
1. The fixed-rate payer in an interest-rate swap has a position equivalent to a series of:
A) long interest-puts and short interest-rate calls.
B) long interest-rate puts and calls.
C) short interest-rate puts and long interest-rate calls (Explanation: The fixed-rate payer has profits when short rates rise and losses when short rates fall, equivalent to writing puts and buying calls)
2. The fixed-rate receiver in a plain vanilla interest rate swap has a position equivalent to a series of:
A) long interest-rate puts and short interest-rate calls. (Explanation: The fixed-rate receiver has profits when short rates fall and losses when short rates rise, equivalent to buying puts and writing calls)
B) long interest-rate puts.
C) short interest-puts and long interest-rate calls
3. For a 1-year quarterly-pay swap, an equivalent position with short puts and long calls would involve:
A) put-call combinations expiring on each of the four settlement dates.
B) three put-call combinations on the last three settlement dates of the swap.
C) three put-call combinations expiring on the first three settlement dates of the swap (Explanation: Interest rate options pay one period after exercise. Options expiring on settlements at t = 1,2,3, will mimic the uncertain swap payments at t = 2,3,4)
4. Writing a series of interest-rate puts and buying a series of interest-rate calls, all at the same exercise rate, is equivalent to:
A) being the floating-rate payer in an interest rate swap.
B) a short position in a series of forward rate agreements.
C) being the fixed-rate payer in an interest rate swap (Explanation: A short position in interest rate puts will have a negative payoff when rates are below the exercise rate; the calls will have positive payoffs when rates exceed the exercise rate. This mirrors the payoffs of the fixed-rate payer who will receive positive net payments when settlement rates are above the fixed rate)
5. An off-market forward rate agreement (FRA):
A) provides a series of payments.
B) has a positive value at contract initiation. (Explanation: An off-market FRA has a contract rate that differs from the zero-value rate at the inception of the contract; by definition, it has a positive value to one of the parties to the FRA)
C) cannot be priced with market rates
6. A swap is equivalent to a series of:
A) interest rate calls.
B) FRAs priced at market rates.
C) off-market FRAs. (Explanation: Since the fixed rate on the swap is the same at every settlement date, a series of FRAs at those fixed rates will have values that differ from zero to the extent the fixed rate and the zero-value rate differ. This makes them off-market FRAs)
7. The floating-rate payer in a simple interest-rate swap has a position that is equivalent to:
A) a series of short FRAs. (Explanation: The floating-rate payer has a liability/gain when rates increase/decrease above the fixed contract rate; the short position in an FRA has a liability/gain when rates increase/decrease above the contract rate)
B) issuing a floating-rate bond and a series of long FRAs.
C) a series of long forward rate agreements (FRAs)
8. Which of the following is equivalent to a plain vanilla receive fixed currency swap?
A) A short position in a foreign bond coupled with a long position in a dollar-denominated floating rate note.
B) A long position in a foreign bond coupled with the issuance of a dollar-denominated floating rate note. (Explanation: A long position in a fixed rate foreign bond will receive fixed coupons denominated in a foreign currency. The short floating rate note requires U.S. dollar denominated floating-rate payments. Combined, these are the same cash flow as a plain vanilla currency swap)
C) A short position in a foreign bond coupled with the issuance of a dollar-denominated floating rate note
9. Which of the following is equivalent to a plain vanilla receive-fixed interest rate swap?
A) A short position in a bond coupled with a long position in a floating rate note.
B) A long position in a bond coupled with the issuance of a floating rate note. (Explanation: A long position in a fixed rate bond pays fixed coupons. The short floating rate note requires floating-rate payments. Together, these are the same cash flow as a receive-fixed swap)
C) A short position in a bond coupled with the issuance of a floating rate note
10. A plain vanilla interest-rate swap to the fixed-rate payer is equivalent to issuing a fixed-rate bond and:
A) buying a floating-rate bond. (Explanation: Paying fixed and receiving floating in a swap is equivalent to issuing a fixed-rate bond and investing the proceeds in a floating rate bond)
B) selling a series of interest rate puts.
C) selling a series of interest rate calls
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