### Questions

**1)** Can you describe the different types of Swaps ?

Interest Rate Swap - same currency, removes interest rate risk

FX Swap - different currencies, removes exchange rate risk (spot transaction and a forward transaction)

Cross Currency Interest Rate Swap - different currencies, removes interest rate risk and removes exchange rate risk.

**2)** What is an Interest Rate Swap ?

This is a type of interest rate derivative.

This lets you remove interest rate risk.

Both legs are in the same currency.

This is an agreement to swap a stream of interest rate payments for a different stream of interest rate payments.

This is typically fixed against floating.

There are no single currency fixed against floating interest rate swaps as the risk can be calculated.

**3)** Why would you buy an Interest Rate Swap ?

Banks - to hedge the risks of their issue

Companies - to control the cost of their funding

Insurance - to hedge interest rate exposure

Hedge Funds - to execute difference types of leverage bets with respect the following:

*) market direction

*) the shape of the volatility surface

*) to build up relative value trades

*) for gamma trading

**4)** Can you give some examples of different types of Interest Rate Swaps ?

Fixed for Floating - (vanilla / most common)

Floating for Floating (Basis Swap) -

**5)** Can you describe the two different cashflows for an Interest Rate Swap ?

Both cash flows are in the same currency

**6)** How do you price an Interest Rate Swap ?

?

**7)** What in an Overnight Index Swap ?

This is an Interest Rate Swap where the floating side references an overnight index such as SONIA and has no intermediate cash flow exchanges only a cumulative exchange at the end.

**8)** What is a FX Swap ?

This lets you remove exchange rate risk.

The two cash flows are in different currencies

This is a type of foreign exchange derivative.

There are two legs, a spot transaction and a forward transaction which are entered at the same time for the same quantity.

**9)** Why would you buy a FX Swap ?

?

**10)** Can you give some examples of different types of FX Swaps ?

Spot to Forward -

Forward to Forward -

**11)** Can you describe the two different cash flows in a FX Swap ?

Lets imagine that we have an amount in Euros and we need to change it into US dollars in 3 months time.

Spot Transaction - The equivalent amount of dollars is bought (using Euros at the current exchange rate).

Forward Transaction - At the end of the contract the same amount of Euros is bought (using Dollars at the agreed forward rate).

**12)** What is a Cross Currency Interest Rate Swap ?

Also known as a currency swap or cross currency swap.

This is a type of interest rate derivative.

This lets you remove exchange rate risk

This lets you remove interest rate risk

The two cash flows are in different currencies.

The parties agree to swap a principal amount in one currency (plus interest) during a specific period for a corresponding amount (plus interest) in a different currency.

These are traded over the counter (not on an exchange)

**13)** Can you give some examples of different types of Cross Currency Interest Rate Swaps ?

Mark to Market -

Non Mark to Market -

**14)** Can you describe the two different cash flows for a Cross Currency Interest Rate Swap ?

The pricing element is known as the basis spread.

**15)** What is the Cost of Carry ?

This is the interest collected (or paid) every night.

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