IR Certification For Sales Roles: Quiz!

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Quizzes Created: 2 | Total Attempts: 232
Questions: 20 | Attempts: 115

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IR Certification For Sales Roles: Quiz! - Quiz



Questions and Answers
  • 1. 

    Which of the following statements is true about the fixed rate of a putable swap relative to a vanilla swap over the same term where the receiver of the fixed-rate has the right to cancel.  The fixed ratepayer will pay a:

    • A.

      Higher fixed rate than the vanilla swap because he has the right to cancel the swap

    • B.

      Lower fixed rate than the vanilla swap because he has passed the right to cancel the swap to the other party

    • C.

      Higher floating rate than the vanilla swap because he has the right to cancel the swap

    • D.

      Lower floating rate than the vanilla swap because he has passed the right to cancel the swap to the other party

    Correct Answer
    B. Lower fixed rate than the vanilla swap because he has passed the right to cancel the swap to the other party
    Explanation
    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.

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  • 2. 

    A floating-rate borrower wants to hedge him/herself against a significant upward shift in the yield curve. In order to achieve this s/he should:

    • A.

      Sell a cap

    • B.

      Buy a floor

    • C.

      Enter into a Payer Swap

    • D.

      Enter into a Receiver Swap

    • E.

      Both the Floor and the Payer Swap will provide him protection against rising interest rates

    Correct Answer
    C. Enter into a Payer Swap
    Explanation
    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.

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  • 3. 

    Which of the following statements is true about the decision to exercise a 1Y5Y Payer Swaption with a strike of 1.75%?

    • A.

      The holder of the swaption will only exercise his option if the market rate for a 5Y swap at expiry is greater than 1.75%

    • B.

      The holder of the swaption will only exercise his option if the relevant LIBOR rate at expiry is greater than 1.75%.

    • C.

      The holder of the swaption will exercise if the market rate for a 5Y swap is less than 1.75%

    • D.

      The holder of the swaption will only exercise his option if the LIBOR rate at expiry isless than 1.75%

    Correct Answer
    A. The holder of the swaption will only exercise his option if the market rate for a 5Y swap at expiry is greater than 1.75%
    Explanation
    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).

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  • 4. 

    Consider an IRS with the following characteristics: 5 Year USD IRS, Pay Fixed 1.75% Receive Float 3M Libor + 15 bp, Notional 100M USD,  DV01 45,800 Yesterday's MTM  +87,200 USD Assume markets moved down by 5 bp in today's  trading.  What would you expect the current MTM to be around?  

    • A.

      Around -140,000 USD

    • B.

      Around 40,000 USD

    • C.

      Around 130,000 USD

    • D.

      Around 315,000 USD

    Correct Answer
    A. Around -140,000 USD
    Explanation
    DV01 defines the sensitivity to a parallel shift in the yield curve.

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  • 5. 

    Why would a corporate most likely enter into an amortising swap?

    • A.

      Because it creates a lower fixed rate where the yield curve is steep

    • B.

      Because they have a loan with a single repayment on maturity

    • C.

      Because they have the right to pay back their loan early

    • D.

      Because they hold or about to take a loan which they are scheduled to pay back incrementally over the loan's life.

    Correct Answer
    D. Because they hold or about to take a loan which they are scheduled to pay back incrementally over the loan's life.
    Explanation
    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.

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  • 6. 

    A US corporate is considering to enter into a cross currency swap to hedge a floating rate Euro denominated bond on 100M EUR that they are about to issue.  Given the swap below and the issued bond, what will be the corporate’s net liability after the entering into the swap?  They will effectively ... Swap Term 2Y Pay USD Fixed 1.5% Receive EUR Float 6M Euribor USD Notional 137 M EUR Notional 100 M Exchange Notional Both at Start and End Date

    • A.

      Pay fixed USD interest and EUR floating interest

    • B.

      Pay EUR floating interest on 100M EUR

    • C.

      Pay no interest as the swap and the bond interest cancel out

    • D.

      Pay USD fixed interest on $137m

    Correct Answer
    D. Pay USD fixed interest on $137m
    Explanation
    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.

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  • 7. 

    If you know that a fixed coupon bond is trading at discount to par, which of the following statements is correct?

    • A.

      The yield must be less than the coupon the bond is paying

    • B.

      The yield must be equal to the coupon the bond is paying

    • C.

      The yield must be greater than the coupon the bond is paying

    • D.

      It is impossible to say

    Correct Answer
    C. The yield must be greater than the coupon the bond is paying
    Explanation
    For a fixed rate bond, the following rules applyL

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

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  • 8. 

    A salesperson offers a client the following four trades to hedge his exposure to higher rates.  Which of the following is likely to require an upfront payment:

    • A.

      Pay fixed swaption collar

    • B.

      Callable swap

    • C.

      Pay fixed swap

    • D.

      Pay fixed swaption

    Correct Answer
    D. Pay fixed swaption
    Explanation
    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.

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  • 9. 

    A Corporate takes out a 10 year loan at Libor + 150 basis points:  In order to hedge his exposure to rising rates, his bank offers him an interest rate collar with cap and floor strikes of 4% and 2% respectively.  If the corporate takes up the offer, which of the following are true about their future net maximum and minimum payments?

    • A.

      Maximum 4% Minimum 2%

    • B.

      Maximum 4% Minimum 1.5%

    • C.

      Maximum 5.5% Minimum 0.5%

    • D.

      Maximum 5.5% Minimum 3.5%

    Correct Answer
    D. Maximum 5.5% Minimum 3.5%
    Explanation
    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%.

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  • 10. 

    The three main components used to build the majority of SD's yield curves are:

    • A.

      Interbank deposit rates (eg LIBOR), FX Swaps, and IRS

    • B.

      Interbank deposit rates (eg LIBOR), Government Bonds or CME Futures, and CMSs

    • C.

      Interbank deposit rates (eg LIBOR), Futures or FRAs and IRS

    • D.

      Interbank deposit rates (eg LIBOR), Futures and Swaptions

    Correct Answer
    C. Interbank deposit rates (eg LIBOR), Futures or FRAs and IRS
    Explanation
    The inclusion of futures/forwards is dependent on whether they exist - futures are generally traded only on more liquid currencies.

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  • 11. 

     Which of the following sentences is NOT true in regards to the following Range Accrual Swap? USD, 5Y Pay Fixed 3% , on range condition as below Observed Index: 3M Libor High Barrier  3% Low Barrier  0.5% Min Coupon 0.6% Receive Float 3M Libor Notional    100M USD

    • A.

      The minimum payment is 0.6% even if Libor is outside the range over the observation dates

    • B.

      The structured coupon payer will benefit if 3m Libor moves outside the range 0.5 - 3%

    • C.

      The floating leg payer will benefit if 3m Libor moves outside the range 0.5 - 3%

    Correct Answer
    C. The floating leg payer will benefit if 3m Libor moves outside the range 0.5 - 3%
    Explanation
    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%.

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  • 12. 

    A regular callable swap where the payer of the fixed leg has the right to cancel can be structured as a combination of:

    • A.

      Payer swap + Receiver swap with different frequency

    • B.

      Payer swap + Buy Receiver swaption

    • C.

      Payer swap + Sell Receiver swaption

    • D.

      Payer swap+ Buy Payer swaption

    • E.

      Payer swap+ Sell Payer swaption

    Correct Answer
    B. Payer swap + Buy Receiver swaption
    Explanation
    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.

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  • 13. 

    A client is reviewing SD’s pricing screen and asks you about DVO1.   You respond that this shows the change in NPV of a position due to a shift of:

    • A.

      1 bp in LIBOR

    • B.

      1% in LIBOR

    • C.

      1 bp in the yield curve

    • D.

      1% in the yield curve

    Correct Answer
    C. 1 bp in the yield curve
    Explanation
    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.

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  • 14. 

    The ability to post collateral in several different currencies enables counterparties to :

    • A.

      Enables the counterparty receiving the collateral to choose which currency they want as collateral

    • B.

      Does not have any effect on the swap, but enables greater convenience in collateral management

    • C.

      Choose to post collateral in the currency that will give the highest return

    • D.

      Raise the margin thresholds in the underlying CSA

    Correct Answer
    C. Choose to post collateral in the currency that will give the highest return
    Explanation
    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.

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  • 15. 

    When would a customer most likely use the LIBOR curve for discounting cash flows, as opposed to OIS curves?

    • A.

      When the customer is trading with a CSA and posts daily collateral

    • B.

      When the customer is trading without a CSA and does not post daily collateral

    • C.

      When the customer is doing long tenor trades

    • D.

      When the customer is doing short tenor trades

    Correct Answer
    B. When the customer is trading without a CSA and does not post daily collateral
    Explanation
    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.

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  • 16. 

    Which of the following is NOT true of a Bermudan Swaption

    • A.

      It has multiple expiry dates

    • B.

      The underlying swap of a Bermudan Swaption has the same tenor regardless of the expiry date chosen

    • C.

      A Bermudan Swaption is more expensive than the same Vanilla Swaption (same strike, tenor, etc)

    • D.

      A Bermudan Swaption will have the same ATMF Rate as the Vanilla with the same charecteristics (tenor, currency, etc)

    Correct Answer
    B. The underlying swap of a Bermudan Swaption has the same tenor regardless of the expiry date chosen
    Explanation
    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.

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  • 17. 

    A corporate treasurer wants to price the following: In 1 year, enter a 5 year USD  payer swap; Fixed rate: 3%; Semi annual Receive: observation index 3m LIBOR; Frequency monthly; payment frequency semi-annual Notional: 100 million USD How would he do it on SDX-IR?

    • A.

      1y5y swaption with strike of 3% observation index 1M LIBOR

    • B.

      1y Forward starting 5y General swap

    • C.

      1y Forward starting 5y Vanilla swap

    • D.

      6y callable swap observation index 6m LIBOR

    Correct Answer
    B. 1y Forward starting 5y General swap
    Explanation
    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.

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  • 18. 

    Pricing an IRS  with a 30/360 daycount basis for 16 months (pay fixed semi annually), you choose a last long stub in the cash flow & dates, what would you expect the division of days per fixing to be on the payer side?

    • A.

      180; 120; 180

    • B.

      120; 180; 180

    • C.

      180; 300

    • D.

      300; 180

    Correct Answer
    C. 180; 300
    Explanation
    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.

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  • 19. 

    An SDX-IR user wants to calculate the effect of a 10 bp parallel shift of the cure on the MV (market value) of his payer swap. How could he do it?

    • A.

      A. Open Pricing table and shift the floating spread by 10bp

    • B.

      B. Shift yield curve by 10 bp; accept and recalculate pricer for updated NPV using original fixed rate

    • C.

      C. Subtract the value of vega * 10 from the NPV

    • D.

      D. Use the new scenario tool to set curve shifts and view MV

    • E.

      both b and d are correct

    Correct Answer
    E. both b and d are correct
    Explanation
    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.

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  • 20. 

    A customer enters into a 2Y USD "in arrears" Pay Fixed, Receive Floating IRS, Payment Frequency: Quarterly Assuming today is April 1, 2014.  When is the first fixing date of this swap?

    • A.

      April 1, 2014

    • B.

      July 1, 2014

    • C.

      April 4, 2016

    Correct Answer
    B. July 1, 2014
    Explanation
    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.

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Mar 17, 2014
    Quiz Created by
    SuperD
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