国际财务管理英文版课后习题集答案解析1.docx
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国际财务管理英文版课后习题集答案解析1.docx
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国际财务管理英文版课后习题集答案解析1
CHAPTER14INTERESTRATEANDCURRENCYSWAPS
SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER
QUESTIONSANDPROBLEMS
QUESTIONS
1.Describethedifferencebetweenaswapbrokerandaswapdealer.
Answer:
Aswapbrokerarrangesaswapbetweentwocounterpartiesforafeewithouttakingariskpositionintheswap.Aswapdealerisamarketmakerofswapsandassumesariskpositioninmatchingoppositesidesofaswapandinassuringthateachcounterpartyfulfillsitscontractualobligationtotheother.
2.Whatisthenecessaryconditionforafixed-for-floatinginterestrateswaptobepossible?
Answer:
Forafixed-for-floatinginterestrateswaptobepossibleitisnecessaryforaqualityspreaddifferentialtoexist.Ingeneral,thedefault-riskpremiumofthefixed-ratedebtwillbelargerthanthedefault-riskpremiumofthefloating-ratedebt.
3.Discussthebasicmotivationsforacounterpartytoenterintoacurrencyswap.
Answer:
Onebasicreasonforacounterpartytoenterintoacurrencyswapistoexploitthecomparativeadvantageoftheotherinobtainingdebtfinancingatalowerinterestratethancouldbeobtainedonitsown.Asecondbasicreasonistolockinlong-termexchangeratesintherepaymentofdebtserviceobligationsdenominatedinaforeigncurrency.
4.Howdoesthetheoryofcomparativeadvantagerelatetothecurrencyswapmarket?
Answer:
Namerecognitionisextremelyimportantintheinternationalbondmarket.Withoutit,evenacreditworthycorporationwillfinditselfpayingahigherinterestrateforforeigndenominatedfundsthanalocalborrowerofequivalentcreditworthiness.Consequently,twofirmsofequivalentcreditworthinesscaneachexploittheir,respective,namerecognitionbyborrowingintheirlocalcapitalmarketatafavorablerateandthenre-lendingatthesameratetotheother.
5.Discusstherisksconfrontinganinterestrateandcurrencyswapdealer.
Answer:
Aninterestrateandcurrencyswapdealerconfrontsmanydifferenttypesofrisk.Interestrateriskreferstotheriskofinterestrateschangingunfavorablybeforetheswapdealercanlayoffonanopposingcounterpartytheunplacedsideofaswapwithanothercounterparty.Basisriskreferstothefloatingratesoftwocounterpartiesbeingpeggedtotwodifferentindices.Inthissituation,sincetheindexesarenotperfectlypositivelycorrelated,theswapbankmaynotalwaysreceiveenoughfloatingratefundsfromonecounterpartytopassthroughtosatisfytheotherside,whilestillcoveringitsdesiredspread,oravoidingaloss.Exchange-rateriskreferstotherisktheswapbankfacesfromfluctuatingexchangeratesduringthetimeittakesthebanktolayoffaswapitundertakesonanopposingcounterpartybeforeexchangerateschange.Additionally,thedealerconfrontscreditriskfromonecounterpartydefaultinganditshavingtofulfillthedefaultingparty’sobligationtotheothercounterparty.Mismatchriskreferstothedifficultyofthedealerfindinganexactoppositematchforaswapithasagreedtotake.Sovereignriskreferstoacountryimposingexchangerestrictionsonacurrencyinvolvedinaswapmakingitcostly,orimpossible,foracounterpartytohonoritsswapobligationstothedealer.Inthisevent,provisionsexistfortheearlyterminationofaswap,whichmeansalossofrevenuetotheswapbank.
6.Brieflydiscusssomevariantsofthebasicinterestrateandcurrencyswapsdiagramedinthechapter.
Answer:
Insteadofthebasicfixed-for-floatinginterestrateswap,therearealsozero-coupon-for-floatingrateswapswherethefixedratepayermakesonlyonezero-couponpaymentatmaturityonthenotionalvalue.Therearealsofloating-for-floatingrateswapswhereeachsideistiedtoadifferentfloatingrateindexoradifferentfrequencyofthesameindex.Currencyswapsneednotbefixed-for-fixed;fixed-for-floatingandfloating-for-floatingratecurrencyswapsarefrequentlyarranged.Moreover,bothcurrencyandinterestrateswapscanbeamortizingaswellasnon-amortizing.
7.Ifthecostadvantageofinterestrateswapswouldlikelybearbitragedawayincompetitivemarkets,whatotherexplanationsexisttoexplaintherapiddevelopmentoftheinterestrateswapmarket?
Answer:
Alltypesofdebtinstrumentsarenotalwaysavailabletoallborrowers.Interestrateswapscanassistinmarketcompleteness.Thatis,aborrowermayuseaswaptogetoutofonetypeoffinancingandtoobtainamoredesirabletypeofcreditthatismoresuitableforitsassetmaturitystructure.
8.SupposeMorganGuaranty,Ltd.isquotingswapratesasfollows:
7.75-8.10percentannuallyagainstsix-monthdollarLIBORfordollarsand11.25-11.65percentannuallyagainstsix-monthdollarLIBORforBritishpoundsterling.AtwhatrateswillMorganGuarantyenterintoa$/£currencyswap?
Answer:
MorganGuarantywillpayannualfixed-ratedollarpaymentsof7.75percentagainstreceivingsix-monthdollarLIBORflat,oritwillreceivefixed-rateannualdollarpaymentsat8.10percentagainstpayingsix-monthdollarLIBORflat.MorganGuarantywillmakeannualfixed-rate£paymentsat11.25percentagainstreceivingsix-monthdollarLIBORflat,oritwillreceiveannualfixed-rate£paymentsat11.65percentagainstpayingsix-monthdollarLIBORflat.Thus,MorganGuarantywillenterintoacurrencyswapinwhichitwouldpayannualfixed-ratedollarpaymentsof7.75percentinreturnforreceivingsemi-annualfixed-rate£paymentsat11.65percent,oritwillreceiveannualfixed-ratedollarpaymentsat8.10percentagainstpayingannualfixed-rate£paymentsat11.25percent.
*9.Assumeacurrencyswapinwhichtwocounterpartiesofcomparablecreditriskeachborrowatthebestrateavailable,yetthenominalrateofonecounterpartyishigherthantheother.Aftertheinitialprincipalexchange,isthecounterpartythatisrequiredtomakeinterestpaymentsatthehighernominalrateatafinancialdisadvantagetotheotherintheswapagreement?
Explainyourthinking.
Answer:
Superficially,itmayappearthatthecounterpartypayingthehighernominalrateisatadisadvantagesinceithasborrowedatalowerrate.However,iftheforwardrateisanunbiasedpredictoroftheexpectedspotrateandifIRPholds,thenthecurrencywiththehighernominalrateisexpectedtodepreciateversustheother.Inthiscase,thecounterpartymakingtheinterestpaymentsatthehighernominalrateisineffectmakinginterestpaymentsatthelowerinterestratebecausethepaymentcurrencyisdepreciatinginvalueversustheborrowingcurrency.
PROBLEMS
1.AlphaandBetaCompaniescanborrowforafive-yeartermatthefollowingrates:
AlphaBeta
Moody’screditratingAaBaa
Fixed-rateborrowingcost10.5%12.0%
Floating-rateborrowingcostLIBORLIBOR+1%
a.Calculatethequalityspreaddifferential(QSD).
b.DevelopaninterestrateswapinwhichbothAlphaandBetahaveanequalcostsavingsintheirborrowingcosts.AssumeAlphadesiresfloating-ratedebtandBetadesiresfixed-ratedebt.Noswapbankisinvolvedinthistransaction.
Solution:
a.TheQSD=(12.0%-10.5%)minus(LIBOR+1%-LIBOR)=.5%.
b.Alphaneedstoissuefixed-ratedebtat10.5%andBetaneedstoissuefloatingrate-debtatLIBOR+1%.AlphaneedstopayLIBORtoBeta.Betaneedstopay10.75%toAlpha.Ifthisisdone,Alpha’sfloating-rateall-in-costis:
10.5%+LIBOR-10.75%=LIBOR-.25%,a.25%savingsoverissuingfloating-ratedebtonitsown.Beta’sfixed-rateall-in-costis:
LIBOR+1%+10.75%-LIBOR=11.75%,a.25%savingsoverissuingfixed-ratedebt.
2.Doproblem1overagain,thistimeassumingmorerealisticallythataswapbankisinvolvedasanintermediary.Assumetheswapbankisquotingfive-yeardollarinterestrateswapsat10.7%-10.8%againstLIBORflat.
Solution:
Alphawillissuefixed-ratedebtat10.5%andBetawillissuefloatingrate-debtatLIBOR+1%.Alphawillreceive10.7%fromtheswapbankandpayitLIBOR.Betawillpay10.8%totheswapbankandreceivefromitLIBOR.Ifthisisdone,Alpha’sfloating-rateall-in-costis:
10.5%+LIBOR-10.7%=LIBOR-.20%,a.20%savingsoverissuingfloating-ratedebtonitsown.Beta’sfixed-rateall-in-costis:
LIBOR+1%+10.8%-LIBOR=11.8%,a.20%savingsoverissuingfixed-ratedebt.
3.CompanyAisaAAA-ratedfirmdesiringtoissuefive-yearFRNs.ItfindsthatitcanissueFRNsatsix-monthLIBOR+.125percentoratthree-monthLIBOR+.125percent.Givenitsassetstructure,three-monthLIBORisthepreferredindex.CompanyBisanA-ratedfirmthatalsodesirestoissuefive-yearFRNs.Itfindsitcanissueatsix-monthLIBOR+1.0percentoratthree-monthLIBOR+.625percent.Givenitsassetstructure,six-monthLIBORisthepreferredindex.Assumeanotionalprincipalof$15,000,000.DeterminetheQSDandsetupafloating-for-floatingrateswapwheretheswapbankreceives.125percentandthetwocounterpartiessharetheremainingsavingsequally.
Solution:
Thequalityspreaddifferentialis[(Six-monthLIBOR+1.0percent)minus(Six-monthLIBOR+.125percent)=].875percentminus[(Three-monthLIBOR+.625percent)minus(Three-monthLIBOR+.125percent)=].50percent,whichequals.375percent.Iftheswapbankreceives.125percent,eachcounterpartyistosave.125percent.Toeffecttheswap,CompanyAwouldissueFRNsindexedtosix-monthLIBORandCompanyBwouldissueFRNsindexedthree-monthLIBOR.CompanyBmightmakesemi-annualpaymentsofsix-monthLIBOR+.125percenttotheswapbank,whichwouldpassallofitthroughtoCompanyA.CompanyA,inturn,mightmakequarterlypaymentsofthree-monthLIBORtotheswapbank,whichwouldpassthroughthree-monthLIBOR-.125percenttoCompanyB.Onanannualized
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