Exam 8: Foreign Currency Derivatives and Swaps

An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa)is known as a/an ________.

TABLE 8.2 Use the information for Polaris Corporation to answer the following question(s). Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00% -Refer to Table 8.2.What portion of the cost of the loan is at risk of changing?

TABLE 8.2 Use the information for Polaris Corporation to answer the following question(s). Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00% -Refer to Table 8.2.If the LIBOR rate jumps to 5.00% after the first year what will be the all-in-cost (i.e.the internal rate of return)for Polaris for the entire loan?

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 #2 is (Assume your firm is borrowing money.)

TABLE 8.2 Use the information for Polaris Corporation to answer the following question(s). Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00% -Refer to Table 8.2.What is the all-in-cost (i.e.,the internal rate of return)of the Polaris loan including the LIBOR rate,fixed spread and upfront fee?

Which of the following would be considered an example of a currency swap?

A foreign currency ________ gives the purchaser the right,not the obligation,to buy a given amount of foreign exchange at a fixed price per unit for a specified period.

Peter Simpson thinks that the U.K.pound will cost $1.43/£ in six months.A 6-month currency futures contract is available today at a rate of $1.44/£.If Peter was to speculate in the currency futures market,and his expectations are correct,which of the following strategies would earn him a profit?

All exchange-traded options are settled through a clearing house but over-the-counter options are not and are thus subject to greater ________ risk.

TABLE 8.1 Use the below mentioned table to answer the following question(s). April 19, 2010, British Pound Option Prices (cents per pound, 62,500 pound contracts). -Refer to Table 8.1.The May call option on pounds with a strike price of 1440 means ________.

As a general statement,it is safe to say that businesses generally use the ________ for foreign currency option contracts,and individuals and financial institutions typically use the ________.

Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures.If each pound futures contract is for an amount of £62,500,how much money did Jack gain or lose from his speculation with pound futures?

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

A foreign currency ________ option gives the holder the right to ________ a foreign currency whereas a foreign currency ________ option gives the holder the right to ________ an option.

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.Choosing strategy #2 will

Futures contracts require that the purchaser deposit an initial sum as collateral.This deposit is called a

The most widely used reference rate for standardized quotations,loan agreements,or financial derivative valuations is the ________.

A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to

Which of the following would an MNE NOT want to do?

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.After the fact,under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.)