Financial Derivatives
Problem Set 6
Prof. Kensinger, Spring 2016
Swaps & IRRM Products
Note: The problems in this set are for class discussion. These mini-cases are all based
on examples given in Topic 3: “Advanced Futures Strategies”
1.
Describe how a swap underwriter could create a synthetic counterparty for a
floating-to-floating interest rate swap in which it pays the party a series of payments
based on the 90-day T-Bill rate and receives a series of payments based on the
LIBOR rate.
2.
Describe how a swap underwriter could create a synthetic counterparty for an equity
return swap in which it pays the party a series of payments based on the S&P 500
stock index and receives a series of payments based on the LIBOR rate.
3.
Describe how a swap underwriter could create a synthetic counterparty for an equity
call swap in which it pays the party a series of payments based on the appreciation of
the S&P 500 stock index and receives a series of payments based on the LIBOR rate.
(If the return on index for any payment period is negative, the underwriter pays
nothing.)
4.
Describe how a swap underwriter could create a synthetic counterparty for an equity
put swap in which it pays the party a series of payments based on the depreciation of
the S&P 500 stock index and receives a series of payments based on the LIBOR rate.
(If the return on index for any payment period is positive, the underwriter pays
nothing.)
5.
Describe how a swap underwriter could create a synthetic counterparty for an equity
asset allocation swap in which it pays the party a series of payments based on the
S&P 500 stock index and receives a series of payments based on the Japanese stock
market index
6.
Describe the issues involved if a swap underwriter wants to create a synthetic
counterparty for an equity asset swap in which it pays the party a series of payments
based on the S&P 500 stock index and receives a series of payments based on the
income stream from a Manhattan office building owned by the swap partner.
7.
Describe how an underwriter could create a synthetic counterparty for a 6% cap on
LIBOR in which it pays the party a series of payments based on the maximum of
zero or LIBOR minus 6%.
8.
Describe how an underwriter could create a synthetic counterparty for a 2% floor on
LIBOR in which it pays the party a series of payments based on the maximum of
zero or 2% minus LIBOR.
9.
Describe how an underwriter could create a synthetic counterparty for a 2,6 collar on
LIBOR in which it pays the party a series of payments based on the maximum of
zero or 2% minus LIBOR, plus the maximum of zero or LIBOR minus 6%.
10. Be prepared to discuss the issues involved if an underwriter wants to create an offset
for a currency swap.