Swap

[Unusualskill]

Hi,

Below is the question that I came across while reading Part 1 FRM Swap:

Which of the following would properly transform a floating-rate liability to a fixed-rate liability? Enter into a pay:

A. Foreign currency swap
B. Fixed interest rate swap
C. Domestic currency swap
D. Floating interest rate swap

May I ask what are the differences of the above swaps as I know when enter into currency swap, there are both fixed and floating but I never come across foreign currency , domestic currency.
Also, Fixed interest rate swap and floating interest rate swap here means pay fixed interest and pay floating interest respectively?

Thank you!

 

[David Harper CFA FRM]

@Unusualskill Can you please cite the source, if you want help? (cc @Nicole Seaman ) I am happy to help where I can, but we've learned the hard way that some sources frankly do not produce GARP-worthy questions and we've gone down some rabbit holes only to discover the question wasn't good. There are a lot of questions floating out there that are just not good and, in some cases, actually can create confusion (not that mine are perfect! ), thanks,

(ps. really quickly, at first glance, this looks like a flawed question to me, i only gave it 20 seconds but these terms too loose ....)

 

[Unusualskill]

I found online, I think it is from Schweser. Erm, so this question is flawed? Thank you! @Nicole Seaman

 

[David Harper CFA FRM]

Hi @Unusualskill My hunch is that it's not from Schweser, because they tend to write pretty good questions, and this is sort of "lazy" which isn't like them; e.g,. "Enter into a pay" is bit lazy for the actual question. But the actual lazy part is that, I think, it seems like choice (A) could be okay, in addition to (B); i.e., couldn't the firm enter into a pay fixed-for-floating currency swap? (I don't think the question eliminates that possibility). In any case, the question is looking for (B) as correct. See below is similar to Hull's Chapter 7 example. MSFT borrows externally at floating rate (e.g., LIBOR) where it has comparative advantage, and transforms this into net fixed borrowing by paying fixed rate (e.g., 8.50%) and receiving LIBOR, so it's net position is transformed to pay fixed (also at a lower effective rate, in this example, where it reduces its fixed cost by 30 bps). I hope that helps!