Lecture 18 Flashcards Preview

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Flashcards in Lecture 18 Deck (13)
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1
Q

Swaps =

A

Multi-period extensions of forward contracts

2
Q

Interest rate swap =

A

Exchanging cash flows based on a fixed rate for cash flows based on a floating rate

3
Q

Foreign exchange swap =

A

Exchange of currencies on several future dates

4
Q

When two swaps are combined

A

Deal’s position is effectively neutral

5
Q

At the time the transaction is initiated

A

It has a 0 NPV, to both parties. It is simply a contract to exchange cash in the future

6
Q

Even if one party backs out

A

No cost to counterparty > simply find replacement

7
Q

If interest rates increase shortly after interest rate swap

A
  • Floating rate payer suffers loss

- Fixed rate payer enjoys gain

8
Q

Loss =

A

Difference between values of fixed and floating rate obligations, not the total value of payments payer obligated to make

9
Q

Credit default swaps

A

Designed to allow lenders to buy protection against default risk and enhance creditworthiness of outstanding loans

10
Q

Credit default swaps logistics

A

Seller collects the annual payments for the term contract, but must compensate the buyer for the loss in bond value in the event of a default

11
Q

CDS issuer

A

Agrees to buy the bond in default/ pay difference between par and market values to CDS buyer

12
Q

Swap holder does not need to

A

Hold bonds in underlying CDS contract

13
Q

Can there be more contracts outstanding than physical bonds to insure?

A

Yes > Lehman Brothers