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Question 1. Which of the following best describes a swap? A) A standardized exchange‑traded contract B) A customized OTC agreement to exchange cash flows C) An option to buy a security at a predetermined price D) A forward contract on a physical commodity Answer: B Explanation: A swap is a privately negotiated, over‑the‑counter contract where two counterparties agree to exchange cash‑flow streams based on specified terms. Question 2. In swap terminology, the “notional principal” is: A) The amount of cash exchanged at each settlement date B) The amount used to calculate payment amounts but not exchanged C) The market value of the swap at inception D) The collateral posted by each party Answer: B Explanation: The notional principal is a reference amount used to compute the cash‑flow obligations; it generally does not change hands, except in currency swaps where principals are exchanged. Question 3. Which market participant typically facilitates the matching of counterparties in the OTC swap market? A) Exchange B) Central Bank C) Dealer (intermediary) D) Clearing House Answer: C
Explanation: Dealers act as market makers, connecting buyers and sellers and often taking the opposite side of a swap to provide liquidity. Question 4. The primary motivation for using a plain‑vanilla interest‑rate swap is to: A) Speculate on commodity prices B) Convert a fixed‑rate exposure to floating or vice‑versa C) Acquire foreign currency exposure without exchanging principal D) Hedge against credit default risk Answer: B Explanation: Interest‑rate swaps allow participants to switch the nature of their interest‑rate cash flows, aiding in risk management or funding cost reduction. Question 5. In a plain‑vanilla IRS, the party that pays the fixed rate is called the: A) Fixed‑rate receiver B) Fixed‑rate payer C) Floating‑rate payer D) Swap dealer Answer: B Explanation: The fixed‑rate payer makes periodic fixed‑rate payments to the floating‑rate payer, who in turn pays a floating rate based on an index. Question 6. Which of the following is NOT a common floating‑rate index used in IRS contracts today? A) SOFR B) EURIBOR C) LIBOR (historical) D) CBOE Volatility Index (VIX)
C) Exchange of a single cash flow at maturity in a foreign currency D) Exchange of equity index returns for a fixed rate Answer: B Explanation: Currency swaps involve exchanging both interest payments and principal amounts in two currencies, typically with principal exchanged at inception and again at maturity. Question 10. In a currency swap, the exchange of principals at inception is primarily used to: A) Reduce counterparty credit risk B) Enable each party to obtain funding in the desired currency at a lower cost C) Create a synthetic equity position D) Hedge against commodity price fluctuations Answer: B Explanation: By swapping principals, each party can effectively borrow in the foreign currency at a rate reflecting the comparative advantage of the counterparties. Question 11. Which principle underlies the pricing of a currency swap? A) Covered Interest Parity (CIP) B) Put‑Call Parity C) Black‑Scholes Model D) Capital Asset Pricing Model (CAPM) Answer: A Explanation: Currency swaps are priced using interest‑rate parity, ensuring that the forward exchange rate reflects the differential between the two currencies’ interest‑rate term structures. Question 12. A basis swap differs from an IRS in that it:
A) Exchanges fixed for floating cash flows B) Exchanges one floating‑rate index for another floating‑rate index C) Requires exchange of principal at maturity D) Is always cleared through a CCP Answer: B Explanation: Basis swaps involve swapping cash flows based on two different floating‑rate benchmarks (e.g., SOFR vs. LIBOR), allowing participants to manage basis risk. Question 13. Which of the following is a typical use of a basis swap? A) Hedge against foreign exchange risk B) Convert a fixed‑rate loan to a floating‑rate loan C) Align floating‑rate exposure with a preferred benchmark D) Obtain synthetic exposure to a commodity price Answer: C Explanation: Basis swaps allow a holder of a loan indexed to one floating rate to switch to another benchmark, reducing mismatches between assets and liabilities. Question 14. An equity swap is best described as: A) An agreement to exchange the total return of an equity index for a fixed or floating cash flow B) A swap that exchanges the price of a single stock for a commodity price C) A currency swap with equity‑linked coupons D) A swap that pays a dividend yield in exchange for a fixed rate Answer: A Explanation: Equity swaps transfer the total return (price appreciation plus dividends) of an equity index or stock to the counterparty in exchange for a predetermined cash flow. Question 15. Which advantage does an equity swap provide to an investor?
Question 18. When a swap is terminated early by mutual agreement, the most common method of settlement is: A) Physical delivery of the underlying asset B) Offsetting the swap with an opposite‑position swap and cash‑settling the net value C) Automatic conversion to an option contract D) Rolling the swap into a longer‑dated swap with the same terms Answer: B Explanation: Parties typically offset the existing swap with a new opposite swap, then exchange a cash payment equal to the net present value of the terminated swap. Question 19. Counterparty credit risk in a swap is the risk that: A) Market rates move against the swap holder B) The counterparty fails to meet its payment obligations C) The swap’s notional amount is incorrectly calculated D) Regulatory changes invalidate the contract Answer: B Explanation: Credit risk refers to the possibility that the counterparty defaults, leaving the non‑defaulting party exposed to loss. Question 20. The term “exposure” in the context of swap credit risk refers to: A) The notional principal amount of the swap B) The current market value of the swap to the non‑defaulting party C) The total cash flows exchanged over the life of the swap D) The amount of collateral posted by the counterparty Answer: B Explanation: Exposure is the amount that would be lost if the counterparty defaulted, measured as the current mark‑to‑market value of the swap.
Question 21. Which of the following is a primary benefit of posting collateral in a swap agreement? A) Eliminates the need for a dealer B) Reduces the effective credit exposure to the amount of posted collateral C) Guarantees a profit for the collateral taker D) Allows the swap to be cleared without a CCP Answer: B Explanation: Collateral mitigates credit risk by covering potential losses up to the collateral amount, thereby lowering net exposure. Question 22. Central Clearing Counterparties (CCPs) are mandated for many swaps in order to: A) Increase the notional size of swaps B) Reduce systemic risk by interposing a neutral party between counterparties C) Provide tax benefits to participants D) Convert all swaps into futures contracts Answer: B Explanation: CCPs stand between the original parties, assume the credit risk, and enforce margin and default procedures, thus reducing systemic risk. Question 23. Under the Dodd‑Frank Act, which type of swaps must be reported to a trade repository? A) All OTC swaps, regardless of standardization B) Only swaps cleared through a CCP C) Only swaps involving US dollar notional amounts above $50 million D) Only exchange‑traded swaps
C) It equals the duration of a fixed‑rate bond with the same cash‑flow schedule D) It is negative for all swaps Answer: B Explanation: Because the floating leg’s cash flow is reset to market rates each period, its price sensitivity to interest‑rate changes is minimal, resulting in near‑zero duration. Question 27. Convexity in swap valuation is important because: A) It determines the swap’s coupon frequency B) It causes the DV01 to change as rates move, affecting hedge effectiveness C) It eliminates the need for collateral D) It fixes the swap’s market value regardless of rate changes Answer: B Explanation: Convexity indicates that the relationship between swap value and interest rates is non‑linear; as rates shift, DV01 changes, requiring dynamic hedge adjustments. Question 28. A “swaption” is: A) A swap that automatically terminates after a set period B) An option granting the holder the right, but not the obligation, to enter into a swap at a future date C) A swap that exchanges equity returns for commodity prices D) A swap that is cleared through a CCP by definition Answer: B Explanation: Swaptions provide optionality; the holder can decide at expiry whether to become a fixed‑rate payer or receiver in an underlying swap. Question 29. In the valuation of a currency swap, the value of the foreign‑currency leg is calculated by:
A) Discounting its cash flows using the domestic currency’s discount curve only B) Discounting its cash flows using the foreign currency’s discount curve and then converting to domestic currency at the current spot rate C) Ignoring the foreign‑currency cash flows because they cancel out D) Using the same discount curve for both legs regardless of currency Answer: B Explanation: Each leg is discounted using its own currency’s zero‑coupon curve; the foreign‑currency present value is then converted to the domestic currency using the prevailing spot exchange rate. Question 30. Which of the following is a typical day‑count convention for Euro‑dollar interest‑rate swaps? A) Actual/365 Fixed B) 30/ C) Actual/ D) Actual/Actual (ISDA) Answer: C Explanation: Euro‑dollar market conventions use Actual/360 for calculating accrued interest on swaps. Question 31. The “effective date” of a swap is: A) The date on which the first cash flow is exchanged B) The date on which the swap contract is signed C) The date on which the notional principal is exchanged (if applicable) D) The date on which the swap is terminated Answer: C Explanation: The effective date marks the start of the contract and, for currency swaps, the exchange of principal; for IRS it is the commencement of interest calculations.
D) Liquidity risk, because basis swaps cannot be terminated early Answer: B Explanation: Basis swaps expose participants to the relative movement between the two floating benchmarks; adverse changes in the spread affect cash‑flow expectations. Question 35. Which of the following best describes “netting” in the context of swap exposure? A) Offsetting the swap with an opposite position in a different market B) Aggregating multiple payment obligations with the same counterparty to a single net amount C) Converting a swap into a futures contract D) Using a swap to hedge a commodity position Answer: B Explanation: Netting reduces credit exposure by consolidating multiple bilateral cash‑flow obligations into one net payable or receivable. Question 36. When a swap is cleared through a CCP, the margin required is primarily intended to cover: A) Operational costs of the swap dealer B) Potential future exposure due to market movements between margin calls C) The notional principal of the swap D) Taxes on the swap’s cash flows Answer: B Explanation: Initial and variation margin posted to a CCP protect against the risk that market moves increase the swap’s value between collateral calls. Question 37. The “forward rate” used in swap pricing is derived from: A) The average of past observed rates over the previous year
B) The spot rate plus a constant spread C) The zero‑coupon yield curve via bootstrapping, representing the market’s expectation of future rates D) The most recent central bank policy rate Answer: C Explanation: Forward rates are implied by the term structure of zero‑coupon yields; they reflect market expectations of future short‑term rates. Question 38. In a plain‑vanilla IRS with semi‑annual payments, the fixed leg’s coupon for a period is calculated as: A) Fixed rate × Notional × (Actual days / 365) B) Fixed rate × Notional × (Days in period / 360) C) Fixed rate × Notional × (Days in period / 12) D) Fixed rate × Notional only (no day‑count adjustment) Answer: B Explanation: For USD swaps using Actual/360, the coupon equals the fixed rate times notional times the fraction of the year represented by the period (days/360). Question 39. Which of the following is a typical reason a corporation would enter a currency swap? A) To speculate on a rise in the domestic interest rate B) To obtain cheaper financing in a foreign currency by exploiting comparative advantage C) To convert a fixed‑rate loan to a floating‑rate loan in the same currency D) To hedge against default risk of a bond issuer Answer: B Explanation: Currency swaps allow firms to borrow in a foreign currency at a lower effective rate than would be available directly, by swapping with a counterparty that has a comparative advantage.
Answer: B Explanation: A swaption is an option; the holder may decide at expiry whether to become a party to the underlying swap. Question 43. The “floating‑rate bond” used in swap valuation represents: A) A bond that pays a fixed coupon equal to the swap’s fixed rate B) A bond that pays a floating rate equal to the index used in the swap’s floating leg C) A bond that pays no coupons, only principal at maturity D) A bond that is issued by the swap dealer Answer: B Explanation: The floating‑rate bond mirrors the cash‑flow pattern of the swap’s floating leg, allowing the swap to be valued as the difference between a fixed‑rate bond and a floating‑rate bond. Question 44. In a commodity swap where the floating leg references a monthly average price, the payment is typically based on: A) The spot price on the payment date B) The average of daily prices over the month preceding the payment date C) The price of a related futures contract D) A fixed price set at inception, regardless of market movements Answer: B Explanation: Commodity swaps often use a reference price such as a monthly average (e.g., average of daily settlement prices) to determine the floating payment. Question 45. Which of the following best describes “basis risk” in the context of an interest‑rate basis swap? A) The risk that the underlying principal is not returned at maturity
B) The risk that the spread between two floating indices widens, causing unexpected cash‑flow differences C) The risk that the swap’s fixed rate becomes negative D) The risk that the swap is not cleared through a CCP Answer: B Explanation: Basis risk arises when the relationship between the two floating benchmarks changes, affecting the net cash flows of the basis swap. Question 46. For an IRS with a maturity of 5 years and semi‑annual payments, how many fixed‑rate cash flows will be exchanged? A) 5 B) 10 C) 4 D) 12 Answer: B Explanation: Semi‑annual payments over 5 years result in 2 payments per year × 5 years = 10 fixed‑rate cash flows. Question 47. The “effective duration” of a swap is: A) The weighted average of the durations of the fixed and floating legs, considering their cash‑flow schedules B) Always equal to the swap’s maturity C) The same as the duration of a zero‑coupon bond with the same maturity D) Negative for all swaps regardless of structure Answer: A Explanation: Effective duration measures the sensitivity of the swap’s value to interest‑rate changes, combining the duration contributions of both legs.
Question 51. The primary purpose of a “cross‑currency basis swap” is to: A) Exchange a fixed coupon for a floating coupon in the same currency B) Hedge against inflation risk C) Transfer the basis spread between two currencies’ floating rates, enabling efficient funding across currencies D) Convert a commodity exposure into an equity exposure Answer: C Explanation: Cross‑currency basis swaps allow participants to manage the spread between floating rates of two currencies, facilitating cheaper cross‑currency funding. Question 52. Which of the following is a typical collateral arrangement for a non‑cleared OTC swap? A) No collateral is required B) Only initial margin is posted, no variation margin C) Both initial margin (to cover potential future exposure) and variation margin (to cover current exposure) are posted D) Collateral is posted only at swap termination Answer: C Explanation: Bilateral collateral agreements often require both initial and variation margin to mitigate credit risk throughout the life of the swap. Question 53. In the valuation of an IRS, the “present value of the floating leg” at any valuation date is equal to: A) The notional amount multiplied by the current floating rate B) The notional amount (i.e., par) because the floating leg resets to market rates C) Zero, because floating payments are unknown D) The sum of all future floating payments discounted at the fixed‑leg curve
Answer: B Explanation: At each reset, the floating leg’s value equals the notional (assuming no accrued interest), because the next floating payment will be set at the prevailing market rate. Question 54. Which day‑count convention is most commonly used for Euro‑area swaps (e.g., EUR swaps)? A) Actual/ B) 30/360 (Eurobond) C) Actual/365 Fixed D) Actual/Actual (ISDA) Answer: C Explanation: Euro‑area swaps typically use Actual/365 Fixed for interest calculations. Question 55. A “forward start swap” is a swap that: A) Begins immediately on the trade date B) Starts at a future date, with the fixed rate set at inception C) Has a floating leg that starts later than the fixed leg D) Is executed as a futures contract on an exchange Answer: B Explanation: Forward start swaps have a future effective date; the fixed rate is determined at trade date, but cash flows commence later. Question 56. When a swap is “uncleared,” the primary regulatory requirement under EMIR for EU counterparties is: A) Mandatory posting of initial margin only B) Real‑time trade reporting to a trade repository and bilateral margining (if the threshold is exceeded)
