Exam 7: Foreign Currency Derivatives and Swaps

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

The main advantage(s) of over-the-counter foreign currency options over exchange traded options is(are)

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 #3? (Assume your firm is borrowing money.)

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

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.

The ________ of an option is the value if the option were to be exercised immediately. It is the options ________ value.

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. Choosing strategy #2 will

Other things equal, the price of an option goes up as the volatility of the option decreases.

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. What was the closing price of the British pound on April 18, 2010?

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

TABLE 7.2 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 7.2. 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?

Financial derivatives are powerful tools that can be used by management for purposes of

Which of the following is NOT a difference between a currency futures contract and a forward contract?

A preferred interest rate swap strategy for a firm with variable-rate debt and that expects rates to go up is to

The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.

What is the reason for an investor to pay for a zero intrinsic value option?

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

The single largest interest rate risk of a firm is

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 exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________.

Interest rate risks that a non-financial MNE faces can affect