Business Administration 4440Q/R/S/T Study Guide - Currency Swap, Interest Rate Risk, Alpha Beta

• School: Western University
• Department: Business Administration
• Course: Business Administration 4440Q/R/S/T
• Professor: Brad Bisho

Document Summary

Questions: describe the difference between a swap broker and a swap dealer. Answer: a swap broker arranges a swap between two counterparties for a fee without taking a risk position in the swap. Answer: for a fixed-for-floating interest rate swap to be possible it is necessary for a quality spread differential to exist. In general, the default-risk premium of the fixed-rate debt will be larger than the default-risk premium of the floating-rate debt: discuss the basic motivations for a counterparty to enter into a currency swap. Answer: one basic reason for a counterparty to enter into a currency swap is to exploit the comparative advantage of the other in obtaining debt financing at a lower interest rate than could be obtained on its own. Answer: name recognition is extremely important in the international bond market. Without it, even a creditworthy corporation will find itself paying a higher interest rate for foreign denominated funds than a local borrower of equivalent creditworthiness.