Exam 13: Foreign Exchange Risk

A US FI wishes to hedge a €10 000 000 loan using euro currency futures.Each euro futures contract is for €125 000, and the hedge ratio is 1.40.The loan is payable in one year in euros.What type of currency hedge is necessary to protect the FI from exchange rate risk?

Assume an FI sells A$100 million for US dollars on the spot currency markets at an exchange rate of A$1.20 to US$1.00 and invests the US dollar assets at an interest rate of 12% for one year.What is the value of the US dollar assets at the end of the year (round to two decimals)?

In a currency swap it is usual to include both principal and interest payments as part of the swap agreement.

Which of the following statements is true?

Suppose an FI has the following assets and liabilities: Assets Liabilities A \1 00 million loans (one year) in dollars A \2 00 million securities (one year) in dollars \ 100 million equivalent EUR loans (one year) (loans made in euros) To invest $100 million of the $200 million securities in one-year euro loans, the Australian FI engaged in the following transactions: At the beginning of the year, it sold $100 million for euros on the spot currency markets at an exchange rate of A$2 to €1. It takes the equivalent euro amount and makes one-year euro loans at a 15% interest rate.At the end of the year, the Australian FI repatriates the funds back to Australia at the same spot currency market rate of A$2/ €1. (a) Calculate the equivalent euro amount of $100 million using the spot exchange rate stated in transaction (1). (b) Calculate the value of the euro assets at the end of the year. (c) Calculate the dollar proceed of the euro investment. (d) Assume that the A$100 million loans yield a rate of 10% p.a.What is the FI's weighted return on investments?

A US FI wishes to hedge a €10 000 000 loan using euro currency futures.Each euro futures contract is for €125 000, and the hedge ratio is 1.40.The loan is payable in one year in euros.How many currency contracts are necessary to hedge this asset?

The dollar loss/gain in a particular currency i can be calculated as:

Which of the following statements best describes the interest rate parity theorem (IRPT)?

Which of the following statements is true for an FI that holds €200,000 in assets and €250,000 in liabilities?

Which of the following statements is true?

Most profits or losses on FX trading for FIs come from taking an open position or speculating in currencies.Revenues from market making-the bid-ask spread-or from acting as agents for retail or wholesale customers generally provide only a secondary or supplementary revenue source.

An FI usually creates an open position by taking an unhedged position in a foreign currency in its FX trading with other FIs.

Which of the following statements is true?

Which of the following statements is true?

Assume an FI sells $100 million for euros on the spot currency markets at an exchange rate of $1.20 to €1.00 and invests the euro assets at an interest rate of 11% for one year.What is the weighted annual return on the FI's portfolio assuming that the $100 million are 20% of the FI's total assets and that the remaining assets are invested in Australian dollar assets at an average interest rate of 8% per annum (round to two decimals)?

Which of the following is an example of interest rate parity?

Assume an FI sells A$100 million for US$ on the spot currency markets at an exchange rate of A$1.20 to $US1.00.What is the US$ value of the investment (round to two decimals)?

In the Australian market in 2013, FX swaps were the most actively traded instruments, at $2.2 trillion per day, followed by spot trading at $2.0 trillion.

According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each country's:

Assume that an FI has the following assets and liabilities: Assets Liabilities A \1 00 million loans (one year) A \2 00 million securities (one year) A \1 00 million equivalent German loans (one year) (loans made in euros) Which of the following statements is true?