Question 1

An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:

Accepted Answer

A)  forward rate agreement. 
B)  interest rate future. 
C)  interest rate swap. 
D)  none of the above 
A)  forward rate agreement. 
B)  interest rate future. 
C)  interest rate swap. 
D)  none of the above

Question 2

Which of the following is an unlikely reason for firms to participate in the swap market?

Accepted Answer

A)  To replace cash flows scheduled in an undesired currency with cash flows in a desired currency. 
B)  Firms may raise capital in one currency but desire to repay it in another currency. 
C)  Firms desire to swap fixed and variable payment or receipt of funds. 
D)  All of the above are likely reasons for a firm to enter the swap market. 
A)  To replace cash flows scheduled in an undesired currency with cash flows in a desired currency. 
B)  Firms may raise capital in one currency but desire to repay it in another currency. 
C)  Firms desire to swap fixed and variable payment or receipt of funds. 
D)  All of the above are likely reasons for a firm to enter the swap market.

Question 3

Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
• Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
• Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50%
• Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 is: (Assume your firm is borrowing money.)

Accepted Answer

A)  that interest rates might go down or that your credit rating might improve. 
B)  that interest rates might go up or that your credit rating might improve. 
C)  that interest rates might go up or that your credit rating might get worse. 
D)  none of the above 
A)  that interest rates might go down or that your credit rating might improve. 
B)  that interest rates might go up or that your credit rating might improve. 
C)  that interest rates might go up or that your credit rating might get worse. 
D)  none of the above

Question 4

Your firm is faced with paying a variable rate debt obligation with the expectation that interest rates are likely to go up. Identify two strategies using interest rate futures and interest rate swaps that could reduce the risk to the firm.

Accepted Answer

Sell a futures position. If rates change

Question 5

One of the reasons companies use interest rate swaps is because they are interested in opportunities to lower the cost of their debt.

Accepted Answer

A) True 
 B)False

Question 6

The London Interbank Offered Rate (LIBOR) is published under the auspices of the British Bankers Association. A panel of 16 major multinational banks self-report their actual borrowing rate.

Accepted Answer

A) True 
 B)False

Question 7

For a corporate borrower, it is especially important to distinguish between credit risk and repricing risk. Explain both types of risks.

Accepted Answer

Credit risk, sometimes termed roll-over

Question 8

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

Accepted Answer

With exchange-traded derivatives, the ex

Question 9

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down, the position outcome would be:

Accepted Answer

A)  Futures price falls; short earns a profit. 
B)  Futures price rises; short earns a loss. 
C)  Future price falls; long earns a loss. 
D)  Futures price rises; long earns a profit. 
A)  Futures price falls; short earns a profit. 
B)  Futures price rises; short earns a loss. 
C)  Future price falls; long earns a loss. 
D)  Futures price rises; long earns a profit.

An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:

Which of the following is an unlikely reason for firms to participate in the swap market?

Your firm is faced with paying a variable rate debt obligation with the expectation that interest rates are likely to go up. Identify two strategies using interest rate futures and interest rate swaps that could reduce the risk to the firm.

One of the reasons companies use interest rate swaps is because they are interested in opportunities to lower the cost of their debt.

The London Interbank Offered Rate (LIBOR) is published under the auspices of the British Bankers Association. A panel of 16 major multinational banks self-report their actual borrowing rate.

For a corporate borrower, it is especially important to distinguish between credit risk and repricing risk. Explain both types of risks.

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down, the position outcome would be:

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

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Exam 8: Interest Risk and Swaps

An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an:

Which of the following is an unlikely reason for firms to participate in the swap market?

Your firm is faced with paying a variable rate debt obligation with the expectation that interest rates are likely to go up. Identify two strategies using interest rate futures and interest rate swaps that could reduce the risk to the firm.

One of the reasons companies use interest rate swaps is because they are interested in opportunities to lower the cost of their debt.

The London Interbank Offered Rate (LIBOR) is published under the auspices of the British Bankers Association. A panel of 16 major multinational banks self-report their actual borrowing rate.

For a corporate borrower, it is especially important to distinguish between credit risk and repricing risk. Explain both types of risks.

How does counterparty risk influence a firm's decision to trade exchange-traded derivatives rather than over-the-counter derivatives?

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down, the position outcome would be:

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Currency Derivatives: Futures and Options

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters