IR Certification For Sales Roles: Quiz!

For the swap to act as a true hedge/tool for swaping the interest rate exposure, the swap's notional should match the capital outstanding on the underlying liability/obligation over time.

Swaps are usually traded without an upfront premium and collars are usually structured at zero cost i.e. the client is not asked to make a payment to buy the collar.

Buying a single swaption will buy definition require a payment.

The inclusion of futures/forwards is dependent on whether they exist - futures are generally traded only on more liquid currencies.

In a regular Callable Swap, the pay fixed side has the right to cancel on a set number of dates in the future.

A callable swapcan be thought of as a combination of a pay fixed vanilla swap and a receive fixed swap with exact opposite cash flows in the future i.e. with the same fixed rate, the same floating rate convention, the same tenor etc, then when the holder of the receive fixed swaption exercises, the cash flows of the two swaps cancel each other out and it is as if the transaction no longer exists.

DVO1 stands for "Dollar Value of 01," which is a measure of the change in the value of a position for a 1 basis point (bp) change in the yield curve. Therefore, the correct answer states that DVO1 shows the change in NPV of a position due to a shift of 1 bp in the yield curve.

The user can calculate the effect of a 10 bp parallel shift of the curve on the MV of his payer swap by either shifting the yield curve by 10 bp and recalculating the pricer for the updated NPV using the original fixed rate (option b), or by using the new scenario tool to set curve shifts and view the MV (option d). Both options b and d are correct methods for calculating the effect of the curve shift on the MV of the payer swap.

The correct answer is 1y Forward starting 5y General swap. This is because the corporate treasurer wants to enter into a 5 year USD payer swap with a fixed rate of 3%. The 1 year forward starting 5 year general swap allows the treasurer to do this by locking in the fixed rate for the next 5 years starting in 1 year's time. The swap will have semi-annual payment frequency and the notional amount will be 100 million USD.

The decision to exercise is based on the underlying swap at expiry, not libor. Effectively the decision is whether this swaption offers the chance to enter into a swap at better than the market rate (for a pay fixed swap this will be less than the market rate of the underlying swap on expiry and for a receive fixed it will be greater than the market rate of the underlying swap on expiry).

As with a regular vanilla IRS, the Cross Currency Swap allows for the 'swapping'/switching of ones obligation from one basis to another.

In this case the swap is used to not only change from paying floating to paying fixed but is also used to effectively pay interest in dollars instead of euros.

For a fixed rate bond, the following rules applyL

If the bond price > par, fixed coupon > yield
If the bond price If the bond price = par, fixed coupon = yield

Paying floating on a loan? Enter into a pay fixed/receive floating swap and effectively switch your obligation from paying floating to paying fixed. Note selling a cap will raise a fixed amount of money here and if rates rise the cap won't be exercised, but it doesn't provide true protection against rates rising to any level.

When the customer is trading without a CSA and does not post daily collateral, they are more likely to use the LIBOR curve for discounting cash flows. This is because the LIBOR curve reflects the market rates for unsecured borrowing, which is more relevant for a customer who is not posting collateral. On the other hand, OIS curves are based on overnight indexed swap rates, which include a risk-free rate and are more appropriate for customers who are trading with a CSA and posting daily collateral.

The first fixing date of this swap is July 1, 2014. This is because the customer enters into a quarterly payment frequency swap, which means that the interest rate on the floating leg of the swap will be determined and fixed every quarter. Since the customer enters the swap on April 1, 2014, the first fixing date will be the next payment date after the start date, which is July 1, 2014.

The above swap is in fact 'Puttable', this means the receiver of the fixed-rate has the right to cancel or to put it another way, the payer of the fixed rate has given the other side the right to cancel. The upside of not having the right to cancel is that the pay fixed gets to pay a lower fixed-rate (than the vanilla rate). The downside is that the swap will be canceled when the payer of the fixed-rate most needs it/makes money i.e. when rates rise.

The ability to post collateral in several different currencies allows counterparties to select the currency that will provide the highest return. This means they can choose to post collateral in a currency that has a higher interest rate or better investment opportunities, maximizing their returns. This option provides flexibility and allows counterparties to make strategic decisions based on market conditions and their investment objectives.

In an IRS with a 30/360 daycount basis for 16 months, if you choose a last long stub in the cash flow and dates, you would expect the division of days per fixing to be 180 days for the first fixing and 300 days for the second fixing on the payer side.

DV01 defines the sensitivity to a parallel shift in the yield curve.

For every day libor stays in the range, the payer of the 'structured coupon' willl pay a fraction of the market rate of this swap i.e. 3%. The receiver of this coupon there wants libor to stay in this range so that he receives the maximum fraction of 3%.

A Bermudan Swaption allows the holder to exercise the option to enter into a swap at multiple specified dates before the expiration. Therefore, it has multiple expiry dates. However, the underlying swap of a Bermudan Swaption does not have the same tenor regardless of the expiry date chosen. The tenor of the underlying swap can vary depending on the chosen expiry date.

When a user buys a cap, this limits his exposure to the floating rate above the strike of the cap. So in this case, if we buy a cap at 4%, then the maximum exposure to libor will be 4% but on top of that, the corporate will have to pay a further 150bp, making the total worst case payment 5.5%.

Likewise, selling the floor at 2%, the corporate will never pay a rate less than the strike of the floor, 2%, regardless of how low libor goes, but on top of that they need to pay a further 150bp (1.5%), which makes the lowest possible payment 3.5%.