Suppose that Dummy Ltd. can borrow $100mil long-term at a cost of 8% p.a. and Intelligent Ltd. can borrow $100mil short-term at a cost equal to the 6-month LIBOR rate plus a spread of 100 bps. Both companies agree to enter into an interest rate swap agreement whereby Dummy Ltd. pays the LIBOR rate plus 50 bps. to Intelligent Ltd., and Intelligent Ltd. pays 8.5% p.a. fixed to Dummy Ltd. What is the net borrowing cost to each company?

A. Net borrowing cost to Dummy Ltd. = 9% p.a. Net borrowing cost to Intelligent Ltd. = LIBOR rate + 100 bps.

B. Net borrowing cost to Dummy Ltd. = LIBOR rate. Net borrowing cost to Intelligent Ltd. = 8% p.a.

C. Net borrowing cost to Dummy Ltd. = LIBOR rate + 50 bps. Net borrowing cost to Intelligent Ltd. = 9% p.a.

D. Net borrowing cost to Dummy Ltd. = LIBOR rate + 100 bps. Net borrowing cost to Intelligent Ltd. = 9% p.a.

E. Net borrowing cost to Dummy Ltd. = LIBOR rate. Net borrowing cost to Intelligent Ltd. = 9% p.a.

Assume you manage a portfolio of debt (i.e., you are a liability manager). Which one of the following actions is most likely to have a similar impact on the duration of the portfolio, as selling ten year bond futures?

A. Paying fixed and receiving floating in an interest rate swap.

B. Issuing commercial paper and buying back ten-year bonds.

C. Contracting to issue a bank accepted bill in ten years time.

D. Receiving fixed and paying floating in an interest rate swap.

A bank takes fixed rate deposits and makes variable rate loans. In respect of this asset-liability mismatch: [1] what interest rate risk does the bank face?; [2] How would a swap be structured to offset this risk?

[Note: assume that any interest rate change will be of the same direction and magnitude across the entire yield curve]

A. [1] the risk that interest rates will fall; [2] receive fixed, pay floating.

B. [1] the risk that interest rates will fall; [2] receive floating, pay fixed.

C. [1] the risk that interest rates will rise; [2] receive floating, pay fixed.

D. [1] the risk that interest rates will rise; [2] receive fixed, pay fixed.

E. [1] the risk that interest rates will rise; [2] receive fixed, pay floating.

Assume you manage a portfolio of debt (liabilities). Which one of the following actions is most likely to have a similar impact on the duration of the portfolio, as buying futures?

A. Issuing five year bonds and buying-back commercial paper.

B. Receiving fixed and paying floating in an interest rate swap.

C. Issuing ten year bonds and buying-back commercial paper.

D. Paying fixed and receiving floating in an interest rate swap.

On 21st March Phil bought three ASX 90 day bank bill (June) contracts when the price was 94.55 and closed out his position two weeks later by selling when the price was 93.55. How much was Phil's profit or loss on this transaction?

A. $7,185 loss.

B. $2,395 profit.

C. $3 loss.

D. $2,395 loss.

E. $7,185 profit.

As a liability manager, you manage a portfolio of bonds with maturities between 3 months and 10 years (i.e., you have already issued the bonds). You predict a fall in the long-term interest rates. Which of the following actions is the best for you to exploit based on your prediction?

A. Buy 10-year futures or enter a 10-year interest rate swap as the receiver.

B. Sell 10-year futures contracts or enter a 10-year interest rate swap as the receiver.

C. Buy 10-year futures or enter a 10-year interest rate swap as the payer.

D. Sell 10-year futures contracts or enter a 10-year interest rate swap as the payer.

Thunder Ltd is an Australian gold mining company. Thunder has not hedged commodity price or foreign exchange risk. Currently, 1 Australian dollar buys 50 U.S. Cents and the current price of gold is US$300 per ounce. Which one of the following scenarios represents the WORST possible outcome for Thunder over the next year?

A. The Australian dollar dollar strengthens against the US dollar, and the gold price falls.

B. The Australian dollar dollar strengthens against the US dollar, and the gold price rises.

C. There is no change in the AUD/USD exchange rate and no change in the gold price.

D. The Australian dollar weakens against the US dollar, and the gold price rises.

E. The Australian dollar dollar weakens against the US dollar, and the gold price falls.

Suppose the swap rate is 8% and the BBSW is 11% for the first quarter. Given that the amount hedged is $50 million, which of the following statements is TRUE about the swap settlement? (Assume quarterly swap cashflows and quarterly compounding)

A. The fixed rate payer pays the floating rate payer $4 million.

B. The floating rate payer pays the fixed rate payer $4 million.

C. The obligations of each party are zero in this quarter.

D. The fixed rate payer pays the floating rate payer $375 000.

E. The floating rate payer pays the fixed rate payer $375 000.