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Question 1 (a) Discuss TWO (2) basic motivations for a counterparty to enter into a...

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Question 1 (a) Discuss TWO (2) basic motivations for a counterparty to enter into a currency swap (4 marks) (b) Consider a one-year currency swap with semi-annual payments. The two currencies are the US and the Euro. The current exchange rate is $0.75 The term structure of interest rates for LIBOR and Euribor are: Days 180 360 LIBOR 7.2% 8.2% Euribor 6.0% 6.6% Calculate the annualized fixed rate in Euros. (9 marks) (c) A bank finds that its assets are not matched with its liabilities. It is taking floating-rate deposits and making fixed-rate loans. Explain how can swaps be used to offset the risk? (3 marks) (d) Explain about the following types of swap contracts: (1) Currency swap Interest rate swap (111) Commodity swap (3 marks) (3 marks) (3 marks) [Total: 25 Marks]

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