Suppose That You Are a Swap Bank and You Notice

question 85

Multiple Choice

Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. $$\begin{array} { | l | l | l | l | } \hline \begin{array} { l } \text { Zero } \\\text { Rates }\end{array} & 1 \text {-year } & \text { 2-year } & \text { 3-year } \\\hline \text { USD } & \$ 3 \% & \$ 4 \% & \$ 5 \% \\\hline \text { euro } & € 2 \% & € 3 \% & € 4 \% \\\hline\end{array}$$ In other words,what will you be willing to pay in euro against receiving USD LIBOR?

• A)5%
• B)4%
• C)3%
• D)2%

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Definitions:

Factor Price

The price at which factors of production (land, labor, capital) are bought and sold.

Production Function

A mathematical model that describes the relationship between inputs used in production and the resulting output.

Profit-maximizing

The process or strategy of adjusting production and operations to achieve the highest possible profit under given conditions.

Fixed Factor

A resource in the production process whose quantity cannot readily be changed in the short term.