chapter 12 solutions 7e

8/13/2019 Chapter 12 Solutions 7e

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CHAPTER 12: SWAPS

END-OF-CHAPTER QUESTIONS AND PROBLEMS

1. (Introduction) Interest rate swas are !"re w#$e%& 'se$ tan 'rren& an$ e*'#t& swas+ ,ea'se near%& a%%,'s#nesses ae s"!e "r! " #nterest rate r#s. Interest rate swas are te r#!ar& !eans " !ana/#n/ tatr#s. S"!e ,'s#nesses ae 'rren& r#s an$ a ew ae e*'#t& r#s+ ,'t tere #s 0#rt'a%%& n" ,'s#ness tat

$"es n"t ass'!e s"!e "r! " #nterest rate r#s.

. (Structure of a Typical Currency Swap) N"t#"na% r#n#a% #s "ten e2an/e$ #n a 'rren& swa+ ,ea'sete a!"'nts are #n $#erent 'rren#es. Tese a!"'nts are e*'#0a%ent at te start " te swa ,'t n"t %#e%&t" ,e e*'#0a%ent at te en$ " te swa. In an #nterest rate "r e*'#t& swa+ te n"t#"na% r#n#a% #s #n tesa!e 'rren&+ s" #t w"'%$ ser0e n" 'r"se t" e2an/e #t. It w"'%$ ,e an e2an/e " e*'a% a!"'nts at te,e/#nn#n/ an$ en$ " te swa.

3. (Pricing and Valuation of Interet Rate Swap) a. In an #nterest rate swa+ te art& an/ #2e$ an$ree#0#n/ %"at#n/ as a "s#t#"n e*'#0a%ent t" #ss'#n/ a #2e$-rate ,"n$ (an$+ t's+ an/ #nterest at a #2e$rate) an$ 's#n/ te r"ee$s t" ,'& a %"at#n/-rate ,"n$ (an$+ t's+ ree#0#n/ #nterest at a %"at#n/ rate). As#!#%ar ,'t ""s#te ar/'!ent+ an ,e 'se$ "r te "'nterart&.

(Pricing and Valuation of Currency Rate Swap) ,. In a 'rren& swa+ te art& !a#n/ a&!ents #n'rren& A an$ ree#0#n/ a&!ents #n 'rren& B as a "s#t#"n e*'#0a%ent t" #ss'#n/ a ,"n$ #n 'rren& Aan$ 's#n/ te r"ee$s t" ,'& a ,"n$ #n 'rren& B. A s#!#%ar ,'t ""s#te ar/'!ent an ,e 'se$ "r te"'nterart&.

3. (Structure of a Typical Interet Rate Swap)F%"at#n/ a&!ent4 567+777+777(7.78)(97:6;7) < 5=37+777F#2e$ a&!ent4 567+777+777(7.78)(97:6;7) < 5==+777Te net a&!ent #s tat te %"at#n/ a&er a&s 51=+777.

=. (Structure of a Typical Currency Swap)D"%%ar a&!ent4 517+777+777(7.79)(1>1:6;7) < 53=7+777Sw#ss ran a&!ent4 SF1=+777+777(7.7>)(1>1:6;7) < SF;76+666Ea art& !aes te#r reset#0e a&!ents. Tere #s n" nett#n/.

;. (Structure of a Typical E!uity Swap)F#2e$ a&!ent4 5177+777+777(.7==)(1>7:6;7) < 5+8=7+777E*'#t& a&!ent4 5177+777+777((18=.>9:11=.= )? 1)) < 53+9;;+=99Te net a&!ent #s tat te art& an/ e*'#t& a&s 5+1;+=99.

8. (Pricing and Valuation of Interet Rate Swap) Te $ea%er #s #n$#at#n/ tat #t w#%% enter #nt" a swa t" ,ete #2e$-rate a&er (an$ %"at#n/-rate ree#0er) at a rate " 8.;7 @ 7.17 < 8.87 "r te #2e$-rate ree#0er (an$%"at#n/-rate a&er) at a rate " 8.;7 @ 7.1= < 8.8=

>. (Pricing and Valuation of Interet Rate Swap) Swas are s#!#%ar t" "rwar$ "ntrats #n tat te& #n0"%0ete "!!#t!ent t" !ae a #2e$ a&!ent an$ ree#0e a %"at#n/ a&!ent at a 't're $ate. #%e a "rwar$"ntrat #s a s#n/%e a&!ent+ a swa #s a ser#es " a&!ents. T's+ a swa #s %#e a ser#es " "rwar$"ntrats. B"t swas an$ "rwar$ "ntrats re*'#re n" ' r"nt a&!ents+ an$ ,"t are s',et t" $ea'%t

r#s. Tere are s"!e $#erenes+ "we0er+ #n tat #n a swa ,"t s#$es " te #rst a&!ent are n"wn.A%s"+ "r a swa+ a%% " te #2e$ a&!ents are te sa!e+ wereas #n a ser#es " "rwar$ "ntrats+ ea"ntrat w"'%$ ,e r#e$ searate%& an$ w"'%$ a0e $#erent #2e$ rates.

9. (So"e #inal Word a$out Swap) Tere are se0era% wa&s t" ter!#nate a swa. A art& an /" ,a t" te"'nterart& an$ as "r an "sett#n/ swa. Te art#es eet#0e%& reate te ""s#te swa. Te& ten "%$""s#te "s#t#"ns t" ea "ter. Te& an ee te tw" swas #n %ae w#t ea !a#n/ te#r ser#es "a&!ents+ ,'t tere w#%% ,e re$#t r#s. A%ternat#0e%&+ te art#es an ane% te tw" swas+ w#t te art&"w#n/ te /reater a!"'nt !a#n/ a as a&!ent " te net a!"'nt "we$ "n te tw" swas t" te "ter

Chapter 12 90 End-of-Chapter Solutions


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art&. I t#s !et"$ #s 'se$+ te art#es s#!%& a/ree t" aet wate0er ter!s e2#st #n te !aret at tet#!e te ""s#te swa #s 't #n %ae. An"ter !eans " ane%#n/ te swa #s "r "ne art& t" a0e a%rea$&entere$ #nt" e#ter a "rwar$ "ntrat "r an "t#"n "n a swa " te ""s#te "s#t#"n. T#s arran/e!enter!#ts esta,%#s!ent " te ter!s " te "sett#n/ swa ,e"re tat swa #s nee$e$.

17. (Structure of a Typical Currency Swap) In a 'rren& swa+ te tw" art#es a/ree t" !ae #nteresta&!ents t" ea "ter #n $#erent 'rren#es. I ,"t 'rren#es are te sa!e+ ten te 'rren& swa

w"'%$ #n0"%0e ea art& !a#n/ #nterest a&!ents #n te sa!e 'rren&+ w# w"'%$ !ae #t an #nterestrate swa. Te ase " 'rren& swas w#t ,"t a&!ents at %"at#n/ rates "r ,"t a&!ents at #2e$ ratesw"'%$ n"t a%& ere. T#s ar/'!ent a%#es "n%& t" 'rren& swas w#t "ne a&!ent at a #2e$ rate an$"ne at a %"at#n/ rate.

11. (Pricing and Valuation of Currency Swap) A 'rren& swa t"Pa& SF %"at#n/Ree#0e %"at#n/

P%'s a 'rren& swa t"Pa& %"at#n/Ree#0e SF #2e$

#s e*'#0a%ent t" a %a#n 0an#%%a #nterest rate swa t"Pa& SF %"at#n/Ree#0e SF #2e$

1. (Interet Rate Swap Strategie) Te ,an ree#0es LIBOR %'s 677 ,as#s "#nts. It "'%$ enter #nt" a swat" a& LIBOR an$ ree#0e te #2e$ rate " 8.= erent. Te LIBOR "!"nents " tese a&!ents w"'%$"set+ %ea0#n/ #t w#t a net ree#t " 8.= %'s 7.76 < 17.= #2e$. Te a&!ent $ates an$ ter!s ($a&s:6;7+et.) "n te %"an an$ te swa w"'%$ nee$ t" ,e te sa!e.

16. (Currency Swap Strategie) Te !ana/er w"'%$ "nt#n'e t" "%$ te e'r"-$en"!#nate$ ,"n$+ /enerat#n/#nterest #n e'r"s+ an$ w"'%$ enter #nt" a 'rren& swa t" a& e'r"s an$ ree#0e "'n$s. Te 'rren& swaw"'%$ a0e n"t#"na% r#n#a% " 3;.1= !#%%#"n an$ 67 !#%%#"n. Its #nterest a&!ent $ates an$ !at'r#t&$ate w"'%$ a0e t" !at t"se " te ,"n$.

T's+ at te start te swa tere w"'%$ ,e a ree#t " 3;.1= !#%%#"n an$ a a&!ent " 67 !#%%#"n+ w#are e*'#0a%ent a!"'nts. S" tere #s n" net as #n%"w "r "'t%"w.

Te e'r"-$en"!#nate$ ,"n$ w#%% "nt#n'e t" ree#0e #nterest at =. erent+ w#%e te swa w#%% res'%t #na&!ent " #nterest #n e'r"s at =.8 erent an$ ree#t " #nterest #n "'n$s at 3.9 erent. N"te tat teswa a&!ent #n e'r"s $"es n"t !at te ,"n$ #nterest a&!ent #n e'r"s+ ,'t t#s r",%e! ann"t ,ea0"#$e$. Te swa rate #s s#!%& n"t te ,"n$ rate. Te swa w#%% res'%t #n a net "'t%"w " e'r"s+ ,'t#nterest w#%% ,e ree#0e$ #n "'n$s.

At te en$ " te swa+ tere w"'%$ ,e a a&!ent " 3;.1= !#%%#"n an$ ree#t " 67 !#%%#"n "n te swa+w# w"'%$ n"t ,e e*'#0a%ent a!"'nts.

Te net eet #s tat te "r#/#na% ,"n$ re!a#ns #n %ae+ ,'t te swa a&!ents w#%% ar"2#!ate te eet" se%%#n/ te e'r"-$en"!#nate$ ,"n$ an$ #n0est#n/ te r"ee$s #n te "'n$-$en"!#nate$ ,"n$.

13. (E!uity Swap Strategie) F#rst r""sa%4 Te e2e't#0e enters #nt" a swa t" a& te $ea%er te ret'rn "n =

!#%%#"n sares+ w#%e te $ea%er a&s te e2e't#0e a #2e$ rate.

Se"n$ r""sa%4 Te e2e't#0e enters #nt" a swa t" a& te $ea%er te ret'rn "n = !#%%#"n sares+ w#%e te$ea%er a&s te e2e't#0e a %"at#n/ rate s' as LIBOR.

T#r$ r""sa%4 Te e2e't#0e enters #nt" a swa t" a& te $ea%er te ret'rn "n = !#%%#"n sares+ w#%e te$ea%er a&s te e2e't#0e te ret'rn "n a $#0ers##e$ st" "rt"%#".

In a%% ases+ te n"t#"na% r#n#a% #s = !#%%#"n 2 57 < 5177.



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1=. (Pricing and Valuation of Interet Rate Swap) a. Te $#s"'nt ,"n$ r#es are as "%%"ws4

Ter! Rate D#s"'nt B"n$ Pr#e97 $a&s 8.77 B7(97) < 1:(1 @ 7.78(97:6;7)) < 7.9>>1>7 $a&s 8.= B7(1>7) < 1:(1 @ 7.78=(1>7:6;7)) < 7.9;=787 $a&s 8.3= B7(87) < 1:(1 @ 7.783=(87:6;7)) < 7.9381

6;7 $a&s 8.== B7(6;7) < 1:(1 @ 7.78==(6;7:6;7)) < 7.99>

Te #2e$ rate #s

7863.797

6;7

99>.79381.79;=7.79>>.7

99>.71=

+++

,. Te #rst net a&!ent #s ,ase$ "n a #2e$ rate " 8.63 erent an$ a %"at#n/ rate " 8 erent4

F#2e$ a&!ent4 56=+777+777(7.7863)(97:6;7) < 5;3+=7F%"at#n/ a&!ent4 56=+777+777(7.78)(97:6;7) < 5;1+=77

Te net #s tat te art& an/ #2e$ !aes a a&!ent " 59+8=7

. Te new $#s"'nt ,"n$ r#es are as "%%"ws4

Ter! Rate D#s"'nt B"n$ Pr#e;7 $a&s ;.> B67(97) < 1:(1 @ 7.7;>(;7:6;7)) < 7.9>>>1=7 $a&s 8.7= B67(1>7) < 1:(1 @ 7.787=(1=7:6;7)) < 7.981=37 $a&s 8.1= B67(87) < 1:(1 @ 7.781=(37:6;7)) < 7.9=3=667 $a&s 8.7 B67(6;7) < 1:(1 @ 7.787(667:6;7)) < 7.96>1

F"r a 51 n"t#"na% r#n#a%+ te 0a%'e " te re!a#n#n/ #2e$ a&!ents #s

7.7863(97:6;7)(7.9>>> @ 7.981= @ 7.9=3= @ 7.96>1) @ 7.96>1 < 1.77>8>;

(n"te4 "r a%% a%'%at#"ns+ a "!'ter was 'se$ t" ",ta#n te #/est re#s#"n).F"r a 51 n"t#"na% r#n#a%+ te 0a%'e " te re!a#n#n/ %"at#n/ a&!ents #s

(1@ 7.78(97:6;7))(7.9>>>) < 1.77;798;

Te 0a%'e " te swa #s+ tere"re+

56=+777+777(1.77;798; ? 1.77>8>;) < ?593+79;

1;. (Pricing and Valuation of Currency Swap) a. Te $"%%ar n"t#"na% r#n#a% #s 56=+777+777. Tee*'#0a%ent #n "'n$s #s 56=+777+777:51.;7 < 1+>8=+777.

,. Te $#s"'nt ,"n$ r#es are "'n$ as "%%"ws4In $"%%ars4

Ter! Rate D#s"'nt B"n$ Pr#e1>7 $a&s 8.77 B7(1>7) < 1:(1 @ 7.78(1>7:6;7)) < 7.9;;6;7 $a&s 8.= B7(6;7) < 1:(1 @ 7.78=(6;7:6;7)) < 7.963=37 $a&s 8.3= B7(=37) < 1:(1 @ 7.783=(=37:6;7)) < 7.>99=87 $a&s 8.== B7(87) < 1:(1 @ 7.78==(87:6;7)) < 7.>;>>

Te #2e$ rate #s



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781;.71>7

6;7

>;>>.7>99=.7963.79;;.7

>;>>.71=

+++

In "'n$s4Ter! Rate D#s"'nt B"n$ Pr#e1>7 $a&s ;.=7 B7(97) < 1:(1 @ 7.7;=(1>7:6;7)) < 7.9;>=

6;7 $a&s 8.17 B7(1>7) < 1:(1 @ 7.7817(6;7:6;7)) < 7.9668=37 $a&s 8.=7 B7(87) < 1:(1 @ 7.78=(=37:6;7)) < 7.>9>987 $a&s >.77 B7(6;7) < 1:(1 @ 7.7>(87:6;7)) < 7.>;1

Te #2e$ rate #s

78=6.71>7

6;7

>;1.7>9>9.79668.79;>=.7

>;1.71=

+++

. F#rst $eter!#ne te #2e$ an$ %"at#n/ rates #n ea 'rren&.

D"%%ars4F%"at#n/4 56=+777+777(7.78)(1>7:6;7) < 51+=+777F#2e$4 56=+777+777(7.781;)(1>7:6;7) < 51+=6+777

P"'n$s4F%"at#n/4 1+>8=+777(7.7;=)(1>7:6;7) < 817+96>F#2e$4 1+>8=+777(7.78=6)(1>7:6;7) < >6+=93

#. D"%%ar #2e$ a&!ent4 51+=6+777P"'n$ #2e$ a&!ent4 >6+=93

##.. D"%%ar #2e$ a&!ent4 51+=6+777P"'n$ %"at#n/ a&!ent4 817+96>

###. D"%%ar %"at#n/ a&!ent4 51+=+777P"'n$ %"at#n/ a&!ent4 817+96>

#0. D"%%ar %"at#n/ a&!ent4 51+=+777P"'n$ #2e$ a&!ent4 >6+=93

$. e #rst #n$ te new $#s"'nt ,"n$ r#es4In $"%%ars4Ter! Rate D#s"'nt B"n$ Pr#e;7 $a&s ;.>7 B17(1>7) < 1:(1 @ 7.7;>(;7:6;7)) < 7.9>>>37 $a&s 8.7= B17(6;7) < 1:(1 @ 7.787=(37:6;7)) < 7.9==137 $a&s 8.1= B17(=37) < 1:(1 @ 7.781=(37:6;7)) < 7.967;77 $a&s 8.7 B17(87) < 1:(1 @ 7.78(;77:6;7)) < 7.>99

In "'n$s4Ter! Rate D#s"'nt B"n$ Pr#e;7 $a&s ;.37 B17(1>7) < 1:(1 @ 7.7;3(;7:6;7)) < 7.9>9337 $a&s ;.97 B17(6;7) < 1:(1 @ 7.7;9(37:6;7)) < 7.9=;737 $a&s 8.67 B17(=37) < 1:(1 @ 7.786(37:6;7)) < 7.91=;77 $a&s 8.3= B17(87) < 1:(1 @ 7.783=(;77:6;7)) < 7.>>9=

F#n$ te 0a%'e " te re!a#n#n/ a&!ents er n"t#"na% r#n#a% " 51 "r 1.

D"%%ars4F#2e$4 7.781;(1>7:6;7)(7.9>>> @ 7.9==1 @ 7.967 @ 7.>99) @ 7.>99 < 1.783=;8>;F%"at#n/4 (1 @ 7.78(1>7:6;7))(7.9>>>) < 1.763713=

P"'n$s4F#2e$4 7.78=6(1>7:6;7)(7.9>93 @ 7.9=;7 @ 7.91= @ 7.>>9=) @ 7.>>9= < 1.7679>16



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"'r %#a,#%#t& "n te ens#"n 'n$ ? > "'r ret'rn r"! te %"at#n/-rate n"te @ LIBOR @ "'r a&!ent t" te swa $ea%er ? LIBOR "'r a&!ent ree#0e$ r"! te swa $ea%er @ ; T"ta% @

Te a&!ent s"'%$ ,e ar"2#!ate%& "ne a% " t#s s#ne #t #s se!#-ann'a% a&. O "'rse+ $#erenta&!ent ter!s w"'%$ a%ter tese res'%ts s%#/t%&.

19. (E!uity Swap Strategie and Currency Swap Strategie) Its 'rrent "s#t#"n #s@ #2e$? %"at#n/

F#rst+ enter #nt" a 'rren& swa t" a& $"%%ars #2e$ an$ ree#0e e'r"s %"at#n/4@ %"at#n/? 5 #2e$

Te "!,#nat#"n " tese tw" swas #s e*'#0a%ent t"@ #2e$? 5 #2e$

N"w enter #nt" an e*'#t& swa t" a& te SJP =77 ret'rn an$ ree#0e $"%%ars #2e$4? SJP=77@ 5 #2e$

Lea0#n/ an "0era%% "s#t#"n "@ #2e$? SJP=77

N"te tat #t as tree swas #n %ae+ ,'t te as %"ws net "'t t" te attern #t wants.

7. (E!uity Swap Strategie) Te #r! w"'%$ %#e t" eet#0e%& se%% 5677+777+777(7.17) < 567+777+777 " st"an$ ,'& an e*'#0a%ent a!"'nt " ,"n$s. It an $" t#s 's#n/ a swa #n w# #t a&s te ret'rn "n te st"an$ ree#0es te ret'rn "n a ,"n$ #n$e2 tat #t "ns#$ers reresentat#0e " te ret'rn "n te ,"n$s #t w"'%$"terw#se ,'&. Te st" a&!ents w"'%$ #n a%% %#e%#""$ ,e e//e$ t" an #n$e2 tat w"'%$ ,ereresentat#0e " te st" #t w"'%$ "terw#se se%%. T's+ te #r! w"'%$ enter #nt" a swa "n 567+777+777n"t#"na% r#n#a%+ r"!#s#n/ t" !ae a&!ents " te t"ta% ret'rn "n st" #n$e2 an$ ree#0e te t"ta% ret'rn"n a ,"n$ #n$e2. Te t"ta% ret'rn #n%'$es $#0#$en$s an$ a#ta% /a#ns "n te st" an$ "'"n #nterest an$

a#ta% /a#ns "n te ,"n$s.

1. (Pricing and Valuation of Currency Swap) F#rst $eter!#ne te a&!ents "n te swa4

Pa&4 517+777+777(7.73) < 5377+777Ree#0e4 ;+=7+777(7.76=) < 1>+8=7

Tere are tw" a&!ents. On ea+ te A!er#an a&s 5377+777 an$ ree#0es 1>+8=7. T's+ eaa&!ent an ,e 0#ewe$ as a "rwar$ "ntrat "n te "'n$+ $en"!#nate$ #n $"%%ars+ w#t a rate "5377+777:1>+8=7 < 51.>>;. F"r e2a!%e+ te A!er#an an 0#ew ea a&!ent as a %"n/ "rwar$"ntrat #n w# e w#%% a& 5377+777 an$ ree#0e 1>+8=7.

Bea'se te swa #s "rret%& r#e$+ te s'! " te 0a%'es " te tw" "ntrats as t" ,e Ker". One "ntrat+"we0er+ as "s#t#0e 0a%'e+ an$ "ne as ne/at#0e 0a%'e. #t"'t !"re #n"r!at#"n+ we ann"t at'a%%&

$eter!#ne te 0a%'e " ea "ntrat+ ,'t we n"w tat "ne #s "s#t#0e an$ te "ter ne/at#0e. Oterw#se+ anar,#tra/e ""rt'n#t& w"'%$ ,e a0a#%a,%e.


chapter 12 solutions 7e

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