Exam 8: Foreign Currency Derivatives and Swaps

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

Unlike the situation with exchange rate risk, there is no uncertainty on the part of management for shareholder preferences regarding interest rate risk. Shareholders prefer that managers hedge interest rate risk rather than having shareholders diversify away such risk through portfolio diversification.

Which of the following is NOT a contract specification for currency futures trading on an organized exchange?

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.

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

Which of the following is an unlikely reason for firms to participate in the swap market?

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

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

Some of the world's largest and most financially sound firms may borrow at variable rates less than LIBOR.

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 #3 will:

Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use.

The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:

________ 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 interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity?

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

Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot price and sells within the next six months at ¥128/$, he will earn a profit of:

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:

The price at which an option can be exercised is called the:

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