FRM一级模考

FRM一级模拟题

1 . Cooper Industries (Cooper) is the pay-fixed counterparty in an interest rate swap. The swap is based on a notional value of $2,000,000 and pays a floating rate based on the 6-month Hong Kong Interbank Offered Rate (HIBOR). Cooper pays a fixed rate of 7% semiannually. A swap payment has just been made. The swap has a remaining life of 18 months, with pay dates at 6, 12, and 18 months. Spot HIBOR rates are shown in the table below.

6-month HIBOR 6.5 %

12-month HIBOR 6.8%

18-month HIBOR 7.5%

24-month HIBOR 7.7%

The value of the swap to Cooper is closest to:

A. $0

B. $6,346

C. $17,093

D. $72,486

Answer: C

The fixed payments made by Cooper are (0.07/2)x$2,000,000 = $70,000. The present value of the

2 . The evolution of the parallel loan into the currency swap overcomes which of the following issues with the parallel loan?

I Default risk.

II Balance sheet impact.

III Currency risk.

A. I only

B. I and II only

C. II and III only

D. III only

Answer: B

The two major problems wish hedging currency exposure with parallel loan agreements

(back-to-back loans) are default risk and balance sheet impact. The default risk can be managed by combining the two independent loans into a single agreement, which is effectively a currency

Swap.

3 . XYZ Corporation plans to issue a l0-year bon d 6 months from now. XYZ would like to hedge the risk that interest rates might rise significantly over the next 6 months. In order to effect this, the treasurer is contemplating entering into a swap transaction. Under the swap, she should:

A. Pay fixed and receive LIBOR

B. Pay LIBOR and receive fixed

C. Either swap (a or b above) will work

D. Neither swap (a or b above) wⅢwork

Answer: A

By entering into a pay fixed/receive LIBOR swap agreement, XYZ will be able to lock in today's fixed rates.

4 . Gamma Industries, Inc. issues an inverse floater with a face value of USD 50,000,000 that pays

a semiannual coupon of 11.50% minus LJBOR. Gamma Industries intends to execute an arbitrage strategy and earn a profit by selling the notes, using the proceeds to purchase a bond with a fixed semiannual coupon rate of 6.75% a year, and hedging the risk by entering into an appropriate swap. Gamma Industries receives a quote from a swap dealer with a fixed rate of 5.75% and a floating rate of LIBOR. What would be the most appropriate type of swap Gamma Industries, Inc. should enter into to hedge their risk?

A. Pay-fixed, receive-fixed

B. Pay-floating, receive-fixed swap

C. Pay-fix, receive-floating

D. The risk cannot be hedged with a swap

Answer: B

A. Incorrect. The company has a floating outflow of (11.50% - LIBOR) and a fixed inflow of (6:75%) x (USD 50,000,000). The swap suggested has two fixed legs which is not an appropriate structure for an interest rate swap which should have a fixed leg and a variabie leg.

B. Correct. The company has a floating outflow of (11.50% - LIBOR) an d a fixed inflow of

(6.75%)x(USD 50,000,000). On the outflow, -LIBOR is the same as an inflow Pay-floating, Receive-fix. Gamma Industries is exposed to interest rate fluctuations of LIBOR. Therefore, the appropriate swap would be a pay-floating, receive-fixed swap.

C. Incorrect. The company has a floating outflow of (11.50% - LIBOR) and a fixed inflow of

(6.75%)x(USD 50,000,000). On the outflow, -LJBOR is the same as an inflow Pay-floating, Receive-fix. Gamma Industries is exposed to interest rate fluctuations of LIBOR. Therefore, the appropriate swap should pay-floating (not fix) and receive fixed (not floating).

D. Incorrect. This risk can indeed be hedged by entering into a swap as the company has both fixed and variable rate cash flows arising from the arbitrage transaction described.

5 . Which of the following positions has the same exposure to interest rates as the receiver of the floating rate on a standard interest rate swap?

A. Long a floating rate note with the same maturity

B. Long a fixed rate note with the same maturity

C. Short a floating rate note with the same maturity

D. Short a fixed rate note with the same maturity

Answer: D

The floating-rate receiver for a standard interest rate swap is obligated to pay a fixed rate. This is just like being short a fixed-rate note with the same maturity as the swap.