Exam 7: Foreign Currency Derivatives and Swaps

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 ________.

A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract.

TABLE 7.1 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 7.1. The May call option on pounds with a strike price of 1440 means

________ 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.

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

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

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

In option valuation, total value is equal to the intrinsic value plus the time value of the option. Define the latter two terms.

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.

Assume that a call option has an exercise price of $1.50/³. At a spot price of $1.45/³, the call option has

The maximum profit that a writer of a call can make is

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?

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an

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

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

Foreign currency options are available both over-the-counter and on organized exchanges.

Which of the following is NOT a factor in determining the price of a currency option?

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?

Company's treasurer decides to go long on a currency put option to

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 7.1. If your firm felt very confident that interest rates would fall or, at worst, remain at current levels, and were very confident about the firm's credit rating for the next 10 years, which strategy (strategies) would you likely choose? (Assume your firm is borrowing money.)