Exam 9: Currency Futures and Swaps

Futures contracts can circumvent the problematic features of forward contracts except the problem that they:

A basis swap involves:

The difference between a currency swap and a foreign exchange swap is that:

Calculate the value of the contract at 4^th February and the credit or debit to the margin account on the 4 ^th February. Suppose that a trader buys one three-month Australian dollar forward contract on 1 February at 0.5662 (USD/AUD). On successive days the following may happen as the settlement exchange rate changes (in accordance with the spot rate)

An option on a swap is a contract that gives the holder the right to:

Suppose that two counterparties, A and B, enter a three-month forward contract on 1 January, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. On 1 March, A decides it no longer needs to sell USD1 million on 31 March, so it enters a one-month forward contract to buy USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C. Calculate the net cost to counterparty A, before transaction costs.

Consider a 3-year interest rate swap with a notional principal of AUD100,000, whereby A receives annual payments based on a floating interest rate and B receives annual payments based on a fixed rate of 5%pa. The floating interest rates on each payment date assume the values 6%, 5% and 4%. Calculate the cash flows in year three.

A money market swap is:

In a parallel loan, the interest payments and the repayment of principal are based on:

Consider a 3-year currency swap with a notional principal of AUD100,000, whereby A receives annual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD). The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year. Calculate the cash flows in year one.

In a currency swap involving A receiving Australian dollar payments and B receiving euro payments, a rise in the actual exchange rate expressed as (EUR/AUD) implies:

Theoretically, arbitrage ensures that:

Futures markets are used primarily for:

The Australian dollar futures contract was not traded on the Sydney Futures Exchange during the 1990s because:

A firm sells AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.5100. How much will the firm gain or lose on the forward contract?

The development of swaps was assisted by:

Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. Which party is likely to default if the spot rate three months hence is 1.8000?

A cross currency interest rate swap involves:

In a currency swap, the interest payments and repayment of the principal are based on:

Suppose that two counterparties, A and B, enter a three-month forward contract on 1 January, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662. On 1 March, A decides it no longer needs to buy USD1 million on 31 March, so it enters a one month forward contract to sell USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C. Calculate the net cost to counterparty A, before transaction costs.