1. Carter enterprises can issue floating rate debt at LIBOR +2 percent or fixed rate debts at 10%.

Brence
manufacturing can issue floating rate debt at LIBOR+3.1 percent or fixed rate debt at 11%.
Suppose carter issues floating rate debt and Brence issues fixed rate debt. They are considering a swap
in which carter will make a fixed rate payment of 7.95% to Brence, and Brence will make a payment
of LIBOR to carter. What are the net payments of carter and Brence if they engage in the swap? Will
carter be better off to issue fixed rate debt or to issue floating rate debt and engage in the swap? Will
Brence be better off to issue floating rate or to issue fixed rate debt and engage in the swap?

2. How the parties involved in currency swaps get benefited? Illustrate with an appropriate example.

3. Intel can issue floating rate debt at LIBOR +1 percent or fixed rate debts at 9%. Microsoft can issue
floating rate debt at LIBOR+2.2 percent or fixed rate debt at 10%. Suppose Intel issues floating rate
debt and Microsoft issues fixed rate debt. They are considering a swap in which Intel will make a fixed
rate payment of 7% to Microsoft, and Microsoft will make a payment of LIBOR to Intel. What are the
net payments of Intel and Microsoft if they engage in the the swap? Will Microsoft be better
off to issue floating rate or to issue fixed rate debt and engage in the swap?

4. Companies Samsung and Nokia have been offered the following rates per annum on a Rs.700 million
7-year investment

Company Fixed Rate Floating Rate

Samsung 16.2% LIBOR
Nokia 18% LIBOR

Company Samsung requires a floating rate loan; company Nokia requires a fixed-rate loan. Design a
swap that will net a bank, acting as intermediary, 0.4% per annum and that will appear equally
attractive to both companies. Explain your calculations.

5. A bank finds that its assets are not matched with its liabilities. It is taking floating-rate deposits and
making fixed-rate loans. How can swaps be used to offset the risk? Illustrate with an example.

6. Companies A and B face the following interest rates:

Company A Company B
US dollars (floating rate) LIBOR+0.5% LIBOR+1%
Canadian dollars (fixed rate) 5.0% 6.5%

Assume that A wants to borrow US dollars at a floating rate of interest and B wants to borrow
Canadian dollars at a fixed rate of interest. A financial institution is planning to arrange a swap and
requires a 50-basis-point spread. If the swap is to appear equally attractive to A and B, what rates of
interest will A and B end up paying?

7. Explain how the credit default swap is important to a genuine hedger. In some situations, it is possible
that a pure speculator spoils the game of credit default swap, so do you think 'pure speculator should
be banned to buy the CDS ' ?
8. Companies HP and Dell have been offered the following rates per annum on a Rs.3000 million 10-year
investment

Company Fixed Rate Floating Rate

HP 16.2% LIBOR
Dell 15% LIBOR

Company HP requires a floating rate investment; company Dell requires a fixed-rate investment.
Design a swap that will net a bank, acting as intermediary, 0.4% per annum and that will appear
equally attractive to both companies. Explain your calculations.

9. Your previous presentations on risk management and hedging with financial derivatives and your
recent promotion to senior risk manager have made you very happy. The management considers you to
be a valuable asset of the firm, and you are seeking for newer opportunities for demonstrating your
potential for even greater responsibilities.

Just recently, you have been assigned the task of explaining the meaning and significance of interest
rate swap to the top level management. You are required to explain the importance of swap in
managing interest rate risk in a country like Nepal. You have the following information, of two
Nepalese commercial banks, at your disposal to make a presentation on interest rate swap.

Commercial Bank A Commercial Bank B

1 Year Fixed Deposit of NPR 100 Million 1 Year Term Loan of NPR 100 Million @
@ 12% p.a. 14% p.a.
3 Months Revolving Loan of NPR 100 3 Months Revolving Deposit of NPR 100
Million @ 3 months NIBOR plus 4% Million @ 3 months NIBOR plus 2%

Note that the Nepal Inter Bank Offer Rate (NIBOR) is currently 10% and it can remain constant or
increase/decrease by 1% each quarter. The primary agendas in your presentation should be (a) the
positions of the two commercial banks under all possible situations with and without interest rate
swap, (b) the profit and loss in all the situations, and (c) the overall significance of interest rate swap.

10. Alexander Dennis, a British automobile company, wishes to borrow US dollars at a fixed rate of
interest. Likewise, CISCO, a multinational IT company in the U.S., wishes to borrow sterling at a
fixed rate of interest. They have been quoted the following rates per annum.

Company Sterling US dollar

Alexander Dennis 11% 7%
CISCO 10.60% 6.20%

Design a swap that will let a bank acting as intermediary 10 basis points per annum, and that will
produce equal gains for each of the two parties.

11. Consider a currency swap of $10 million and Swiss Franc 15 million. One party pays dollars at a fixed
rate of 9 percent, and the other party pays Swiss Francs at a fixed rate of 8 percent. The payments are
made semiannually based on the exact day count assuming there are 360 days in a year. The current
period has 181 days. Calculate the next payment each party makes.