Question 1

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 2

Compare and contrast foreign currency options and futures. Identify situations when you may prefer one vs. the other when speculating on foreign exchange.

Accepted Answer

Foreign currency futures are derivative

Question 3

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 4

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

Accepted Answer

A)  A futures contract is a standardized amount per currency whereas the forward contact is for any size desired. 
B)  A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year. 
C)  Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages. 
D)  All of the above are true. 
A)  A futures contract is a standardized amount per currency whereas the forward contact is for any size desired. 
B)  A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year. 
C)  Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages. 
D)  All of the above are true.

Question 5

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. If the LIBOR rate falls to 3.00% after the first year what will be the all-in-cost (i.e. the internal rate of return) for Polaris for the entire loan?

Accepted Answer

A)  4.00% 
B)  4.50% 
C)  5.25% 
D)  5.60% 
A)  4.00% 
B)  4.50% 
C)  5.25% 
D)  5.60%

Question 6

All futures contracts are between the client and the exchange clearing house thus effectively eliminating specific counterparty risk at delivery date.

Accepted Answer

A) True 
 B)False

Question 7

The value of a European style call option is the sum of two components, the

Accepted Answer

A)  present value plus the intrinsic value. 
B)  time value plus the present value. 
C)  intrinsic value plus the time value. 
D)  the intrinsic value plus the standard deviation. 
A)  present value plus the intrinsic value. 
B)  time value plus the present value. 
C)  intrinsic value plus the time value. 
D)  the intrinsic value plus the standard deviation.

Question 8

A call option whose exercise price exceeds the spot rate is said to be

Accepted Answer

A)  in-the-money. 
B)  at-the-money. 
C)  out-of-the-money. 
D)  over-the-spot. 
A)  in-the-money. 
B)  at-the-money. 
C)  out-of-the-money. 
D)  over-the-spot.

Question 9

An ________ option can be exercised only on its expiration date, whereas an ________ option can be exercised anytime between the date of writing up to and including the exercise date.

Accepted Answer

A)  American; European 
B)  American; British 
C)  Asian; American 
D)  European; American 
A)  American; European 
B)  American; British 
C)  Asian; American 
D)  European; American

Question 10

Currency futures contracts have become standard fare and trade readily in the world money centers.

Accepted Answer

A) True 
 B)False

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

Compare and contrast foreign currency options and futures. Identify situations when you may prefer one vs. the other when speculating on foreign exchange.

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

All futures contracts are between the client and the exchange clearing house thus effectively eliminating specific counterparty risk at delivery date.

The value of a European style call option is the sum of two components, the

A call option whose exercise price exceeds the spot rate is said to be

An option can be exercised only on its expiration date, whereas an option can be exercised anytime between the date of writing up to and including the exercise date.

Currency futures contracts have become standard fare and trade readily in the world money centers.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

Exam 7: 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

Compare and contrast foreign currency options and futures. Identify situations when you may prefer one vs. the other when speculating on foreign exchange.

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

All futures contracts are between the client and the exchange clearing house thus effectively eliminating specific counterparty risk at delivery date.

The value of a European style call option is the sum of two components, the

A call option whose exercise price exceeds the spot rate is said to be

An ________ option can be exercised only on its expiration date, whereas an ________ option can be exercised anytime between the date of writing up to and including the exercise date.

Currency futures contracts have become standard fare and trade readily in the world money centers.

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

An option can be exercised only on its expiration date, whereas an option can be exercised anytime between the date of writing up to and including the exercise date.