Question 1

Outright techniques of interest rate risk management do not include which of the following?

Accepted Answer

A)  forward rate agreements 
B)  interest rate futures 
C)  currency swaps 
D)  cap, floors, and collars 
A)  forward rate agreements 
B)  interest rate futures 
C)  currency swaps 
D)  cap, floors, and collars D

Question 2

TABLE 15.1
Use the information for Polaris Corporation to answer 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 15.1. 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?

Accepted Answer

A)  4.00% 
B)  5.00% 
C)  5.53% 
D)  6.09% 
A)  4.00% 
B)  5.00% 
C)  5.53% 
D)  6.09% D

Question 3

Which of the following is NOT true?

Accepted Answer

A)  A plain vanilla swap allows a firm to change the currency of denomination of debt service. 
B)  A swap does not change the legal liabilities of existing debt obligations of MNEs. 
C)  The swap market does not differentiate participants on the basis of credit quality. 
D)  All of the above are true. 
A)  A plain vanilla swap allows a firm to change the currency of denomination of debt service. 
B)  A swap does not change the legal liabilities of existing debt obligations of MNEs. 
C)  The swap market does not differentiate participants on the basis of credit quality. 
D)  All of the above are true. D

Question 4

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 5

TABLE 15.2
Use the information to answer following question(s).
  
-Refer to Table 15.2. Which of the following swap agreements could work for Shell and Merck with Barclay's as the facilitating bank?

Accepted Answer

A)  Merck borrows at a fixed rate of 6% and then enters into "receive fixed, pay floating" interest rate swap with Barclay's. Shell borrows money at a variable rate of LIBOR + 1% and then enters into "receive variable, pay fixed" interest rate swap with Barclay's. 
B)  Shell borrows at a fixed rate of 6% and then enters into a "receive variable, pay fixed" interest rate swap with Barclay's. Merck borrows money at a variable rate of LIBOR + 1% and then enters into "receive fixed, pay floating" interest rate swap with Barclay's. 
C)  Shell borrows at a fixed rate of 6% and then enters into "receive fixed, pay floating" interest rate swap with Barclay's. Merck borrows money at a variable rate of LIBOR + 1% and then enters into "receive variable, pay fixed" interest rate swap with Barclay's. 
D)  None of the above would satisfy both Shell and Merck. 
A)  Merck borrows at a fixed rate of 6% and then enters into "receive fixed, pay floating" interest rate swap with Barclay's. Shell borrows money at a variable rate of LIBOR + 1% and then enters into "receive variable, pay fixed" interest rate swap with Barclay's. 
B)  Shell borrows at a fixed rate of 6% and then enters into a "receive variable, pay fixed" interest rate swap with Barclay's. Merck borrows money at a variable rate of LIBOR + 1% and then enters into "receive fixed, pay floating" interest rate swap with Barclay's. 
C)  Shell borrows at a fixed rate of 6% and then enters into "receive fixed, pay floating" interest rate swap with Barclay's. Merck borrows money at a variable rate of LIBOR + 1% and then enters into "receive variable, pay fixed" interest rate swap with Barclay's. 
D)  None of the above would satisfy both Shell and Merck.

Question 6

A basis point is ________.

Accepted Answer

A)  1.00% 
B)  0.10% 
C)  0.01% 
D)  none of the above 
A)  1.00% 
B)  0.10% 
C)  0.01% 
D)  none of the above

Question 7

Instruction 15.1:
For 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 15.1. Choosing strategy #1 will

Accepted Answer

A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period. 
A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period.

Question 8

TABLE 15.1
Use the information for Polaris Corporation to answer 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 Table 15.1. What portion of the cost of the loan is at risk of changing?

Accepted Answer

A)  the LIBOR rate 
B)  the spread 
C)  the upfront fee 
D)  all of the above 
A)  the LIBOR rate 
B)  the spread 
C)  the upfront fee 
D)  all of the above

Question 9

TABLE 15.1
Use the information for Polaris Corporation to answer 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 Table 15.1. Polaris could have locked in the future interest rate payments by using

Accepted Answer

A)  a forward rate agreement. 
B)  an interest rate future. 
C)  an interest rate swap. 
D)  any of the above. 
A)  a forward rate agreement. 
B)  an interest rate future. 
C)  an interest rate swap. 
D)  any of the above.

Question 10

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

Accepted Answer

A)  pay fixed-rate interest and receive floating rate interest. 
B)  pay floating rate and receive fixed rate. 
C)  pay fixed rate and receive fixed rate. 
D)  pay floating rate and receive floating rate. 
A)  pay fixed-rate interest and receive floating rate interest. 
B)  pay floating rate and receive fixed rate. 
C)  pay fixed rate and receive fixed rate. 
D)  pay floating rate and receive floating rate.

Question 11

Polaris Inc. has a significant amount of bonds outstanding denominated in yen because of the attractive variable rate available to the firm in yen when the loan was made. However, Polaris does not have significant receivables in yen. Options available to Polaris to consider the risk of such a loan include which one of the following?

Accepted Answer

A)  doing nothing to offset the need for yen 
B)  developing a currency swap of paying dollars and receiving yen 
C)  developing an interest rate swap of receiving a variable rate while paying a fixed rate 
D)  Polaris may engage in any of the strategies to a varying degree of effectiveness. 
A)  doing nothing to offset the need for yen 
B)  developing a currency swap of paying dollars and receiving yen 
C)  developing an interest rate swap of receiving a variable rate while paying a fixed rate 
D)  Polaris may engage in any of the strategies to a varying degree of effectiveness.

Question 12

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 ________.

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 13

Which of the following is NOT true regarding a corporate policy?

Accepted Answer

A)  A policy is intended to limit or restrict management actions. 
B)  Policies make management decision-making more difficult in potentially harmful situations. 
C)  A policy is intended to restrict some subjective management decision-making. 
D)  A policy is intended to establish operating guidelines independently of staff. 
A)  A policy is intended to limit or restrict management actions. 
B)  Policies make management decision-making more difficult in potentially harmful situations. 
C)  A policy is intended to restrict some subjective management decision-making. 
D)  A policy is intended to establish operating guidelines independently of staff.

Question 14

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

Accepted Answer

A) True 
 B)False

Question 15

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 16

A/an ________ is a contract to lock in today interest rates over a given period of time.

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 17

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

Accepted Answer

A)  Pay a very low fixed rate of interest in the long term. 
B)  Swap into a foreign currency payment that is falling in value. 
C)  Swap into a floating interest rate receivable just prior to interest rates going up. 
D)  Swap into a fixed interest rate receivable just prior to interest rates going up. 
A)  Pay a very low fixed rate of interest in the long term. 
B)  Swap into a foreign currency payment that is falling in value. 
C)  Swap into a floating interest rate receivable just prior to interest rates going up. 
D)  Swap into a fixed interest rate receivable just prior to interest rates going up.

Question 18

Cross currency swaps typically have larger swings in total value than "plain vanilla" interest rate swaps because

Accepted Answer

A)  cross currency swaps exchange principal as well as interest payments. 
B)  interest rate movements are more volatile than currency movements. 
C)  interest rate swap agreements do not allow, contractually, large movements from par. 
D)  all of the above. 
A)  cross currency swaps exchange principal as well as interest payments. 
B)  interest rate movements are more volatile than currency movements. 
C)  interest rate swap agreements do not allow, contractually, large movements from par. 
D)  all of the above.

Question 19

________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set.

Accepted Answer

A)  Credit risk; Interest rate risk 
B)  Repricing risk; Credit risk 
C)  Interest rate risk; Credit risk 
D)  Credit risk; Repricing risk 
A)  Credit risk; Interest rate risk 
B)  Repricing risk; Credit risk 
C)  Interest rate risk; Credit risk 
D)  Credit risk; Repricing risk

Question 20

Instruction 15.1:
For 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 15.1. Choosing strategy #3 will

Accepted Answer

A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period. 
A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period.

Outright techniques of interest rate risk management do not include which of the following?

Which of the following is NOT true?

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

TABLE 15.2 Use the information to answer following question(s). -Refer to Table 15.2. Which of the following swap agreements could work for Shell and Merck with Barclay's as the facilitating bank?

A basis point is ________.

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

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 ________.

Which of the following is NOT true regarding a corporate policy?

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

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.

A/an ________ is a contract to lock in today interest rates over a given period of time.

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

Cross currency swaps typically have larger swings in total value than "plain vanilla" interest rate swaps because

is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. is the risk of changes in interest rates charged at the time a financial contract rate is set.

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Global Cost and Availability of Capital

Sourcing Equity Capital Globally

Financial Structure and International Debt

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

Multinational Capital Budgeting

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

Exam 15: Interest Rate and Currency Swaps

Outright techniques of interest rate risk management do not include which of the following?

Which of the following is NOT true?

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

TABLE 15.2 Use the information to answer following question(s). -Refer to Table 15.2. Which of the following swap agreements could work for Shell and Merck with Barclay's as the facilitating bank?

A basis point is ________.

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

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 ________.

Which of the following is NOT true regarding a corporate policy?

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

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.

A/an ________ is a contract to lock in today interest rates over a given period of time.

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

Cross currency swaps typically have larger swings in total value than "plain vanilla" interest rate swaps because

________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set.

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Foreign Currency Derivatives

Transaction Exposure

Operating Exposure

Translation Exposure

Global Cost and Availability of Capital

Sourcing Equity Capital Globally

Financial Structure and International Debt

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Strategy

Political Risk Assessment and Management

Multinational Capital Budgeting

International Trade Finance

Multinational Tax Management

Working Capital Management

Filters

is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. is the risk of changes in interest rates charged at the time a financial contract rate is set.