1. Say we are in a country that does not permit corporations to have on balance-sheet exposure to equity market risk, so the company cannot, for example, take positions in equities or equity indices outright. How might a CFO of a company still take on such risks?
A. Enter into an equity swap to pay the equity index return and receive Libor.
B. Enter into an equity swap to receive the equity index return and pay Libor.
C. Both (a) and (b).
D. Neither (a) nor (b).
2. Consider a fixed notional equity-for-floating rate swap. The fair price of the swap is to exchange equity for Libor plus a spread x, where the spread x is
A. Greater than zero if the Libor payer has a lower rating than the equity return payer.
B. Greater than zero if the equity return payer has a lower rating than the Libor payer.
C. Always less than zero because the Libor leg has lower volatility than the equity leg.
D. Zero regardless of credit rating considerations.