Question 1

Futures contracts can circumvent the problematic features of forward contracts except the problem that they:

Accepted Answer

A)   are not standardised
B)   have a high risk of default
C)   lack liquidity
D)   have short maturities D

Question 2

A basis swap involves:

Accepted Answer

A)   two variable interest rates
B)   two fixed interest rates
C)   both two variable interest rates and two fixed interest rates
D)   none of the given answers A

Question 3

The difference between a currency swap and a foreign exchange swap is that:

Accepted Answer

A)   in the currency swap, only the principal amount is exchanged
B)   in the currency swap, only interest payments are ever exchanged
C)   in the foreign exchange swap, only the principal amount is exchanged, whereas in a currency swap, a principal amount is usually exchanged at the outset and repayments occur over time involving both principal and interest
D)   in the foreign exchange swap, only interest payments are exchanged C

Question 4

Calculate the value of the contract at 4th February and the credit or debit to the margin account on the 4 th February. Suppose that a trader buys one three-month Australian dollar forward contract on 1 February at 0.5662 (USD/AUD). On successive days the following may happen as the settlement exchange rate changes (in accordance with the spot rate)

Accepted Answer

A)   57,500 and -880
B)   57,500 and +880
C)   57,500 and +650
D)   57,500 and -650

Question 5

An option on a swap is a contract that gives the holder the right to:

Accepted Answer

A)   engage in a specified swap
B)   terminate the swap without paying a penalty
C)   swap one option for another
D)   buy out the swap

Question 6

Suppose that two counterparties, A and B, enter a three-month forward contract on 1 January, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. On 1 March, A decides it no longer needs to sell USD1 million on 31 March, so it enters a one-month forward contract to buy USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C. Calculate the net cost to counterparty A, before transaction costs.

Accepted Answer

A)   0.0338
B)   -AUD33 800
C)   AUD33 800
D)   AUD1.8 million

Question 7

Consider a 3-year interest rate swap with a notional principal of AUD100,000, whereby A receives annual payments based on a floating interest rate and B receives annual payments based on a fixed rate of 5%pa. The floating interest rates on each payment date assume the values 6%, 5% and 4%. Calculate the cash flows in year three.

Accepted Answer

A)   B pays A USD1,000
B)   A pays B USD1,000
C)   B pays A AUD1,000
D)   A pays B AUD1,000

Question 8

A money market swap is:

Accepted Answer

A)   a swap involving interest rates on two money market instruments
B)   a swap involving the yields on money and bonds
C)   a swap involving the yields on money and Treasury bills
D)   a swap with a maturity of three years or less

Question 9

In a parallel loan, the interest payments and the repayment of principal are based on:

Accepted Answer

A)   an exchange rate that is agreed upon in advance
B)   the forward exchange rate
C)   the expected spot exchange rate
D)   the exchange rate prevailing when the payment is due

Question 10

Consider a 3-year currency swap with a notional principal of AUD100,000, whereby A receives annual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD). The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year. Calculate the cash flows in year one.

Accepted Answer

A)   B pays A USD2,000
B)   A pays B USD2,000
C)   B pays A AUD2,000
D)   A pays B AUD2,000

Question 11

In a currency swap involving A receiving Australian dollar payments and B receiving euro payments, a rise in the actual exchange rate expressed as (EUR/AUD) implies:

Accepted Answer

A)   appreciation of the euro and a loss incurred by B
B)   depreciation of the euro and a loss incurred by A
C)   appreciation of the Australian dollar and a loss incurred by B
D)   depreciation of the Australian dollar and a loss incurred by A

Question 12

Theoretically, arbitrage ensures that:

Accepted Answer

A)   the offer forward rate is equal to the futures bid rate
B)   the offer forward rate is equal to the futures offer rate
C)   the futures offer rate is equal to the futures bid rate
D)   the bid-offer spread in the forward and futures markets are equal

Question 13

Futures markets are used primarily for:

Accepted Answer

A)   trading
B)   speculation
C)   hedging
D)   position taking

Question 14

The Australian dollar futures contract was not traded on the Sydney Futures Exchange during the 1990s because:

Accepted Answer

A)   of the lack of demand for the contract
B)   it did not have the same specifications as the contract traded on the IMM
C)   forward contracts are better hedging and speculative instruments
D)   the Australian dollar is not a major currency

Question 15

A firm sells AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.5100.
 How much will the firm gain or lose on the forward contract?

Accepted Answer

A)   -AUD10 000
B)   -USD10 000
C)   AUD10 000
D)   USD10 000

Question 16

The development of swaps was assisted by:

Accepted Answer

A)   government regulations restricting access to some European capital markets
B)   an interest rate swap arranged between the IFM and UNESCO
C)   a currency swap between the World Bank and IBM
D)   both an interest rate swap arranged between the IFM and UNESCO and a currency swap between the World Bank and IBM

Question 17

Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662.
 Which party is likely to default if the spot rate three months hence is 1.8000?

Accepted Answer

A)   counterparty A
B)   counterparty B
C)   both counterparty A and counterparty B
D)   neither counterparty

Question 18

A cross currency interest rate swap involves:

Accepted Answer

A)   two fixed interest rates on two currencies
B)   two floating interest rates on two currencies
C)   a fixed interest rate on one currency and a floating interest rate on another currency
D)   two fixed or floating interest rates on two currencies, neither of which is the U.S. dollar

Question 19

In a currency swap, the interest payments and repayment of the principal are based on:

Accepted Answer