Question 1

An agreement to swap the currencies of a debt service obligation would be termed a/an:

Accepted Answer

A)  currency swap. 
B)  forward swap. 
C)  interest rate swap. 
D)  none of the above 
A)  currency swap. 
B)  forward swap. 
C)  interest rate swap. 
D)  none of the above

Question 2

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

Accepted Answer

A)  do nothing. 
B)  pay floating and receive fixed. 
C)  receive floating and pay fixed. 
D)  none of the above 
A)  do nothing. 
B)  pay floating and receive fixed. 
C)  receive floating and pay fixed. 
D)  none of the above

Question 3

For a corporate borrower, it is especially important to distinguish between credit risk and repricing risk. Explain both types of risks.

Accepted Answer

Credit risk, sometimes termed roll-over

Question 4

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going up, the position outcome would be:

Accepted Answer

A)  Futures price falls; short earns a profit. 
B)  Futures price rises; short earns a loss. 
C)  Future price falls; long earns a loss. 
D)  Futures price rises; long earns a profit. 
A)  Futures price falls; short earns a profit. 
B)  Futures price rises; short earns a loss. 
C)  Future price falls; long earns a loss. 
D)  Futures price rises; long earns a profit.

Question 5

Swap rates are derived from the yield curves in each major currency.

Accepted Answer

A) True 
 B)False

Question 6

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. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #2 is: (Assume your firm is borrowing money.)

Accepted Answer

A)  that interest rates might go down or that your credit rating might improve. 
B)  that interest rates might go up or that your credit rating might improve. 
C)  that interest rates might go up or that your credit rating might get worse. 
D)  none of the above 
A)  that interest rates might go down or that your credit rating might improve. 
B)  that interest rates might go up or that your credit rating might improve. 
C)  that interest rates might go up or that your credit rating might get worse. 
D)  none of the above

Question 7

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 #1 will:

Accepted Answer

A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period. 
A)  guarantee the lowest average annual rate over the next three years. 
B)  eliminate credit risk but retain repricing risk. 
C)  maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. 
D)  preclude the possibility of sharing in lower interest rates over the three-year period.

Question 8

A basis point is one-tenth of one percent.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following would be considered an example of a currency swap?

Accepted Answer

A)  exchanging a dollar interest obligation for a British pound obligation 
B)  exchanging a eurodollar interest obligation for a dollar obligation 
C)  exchanging a eurodollar interest obligation for a British pound obligation 
D)  All of the above are examples of a currency swap. 
A)  exchanging a dollar interest obligation for a British pound obligation 
B)  exchanging a eurodollar interest obligation for a dollar obligation 
C)  exchanging a eurodollar interest obligation for a British pound obligation 
D)  All of the above are examples of a currency swap.

An agreement to swap the currencies of a debt service obligation would be termed a/an:

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

For a corporate borrower, it is especially important to distinguish between credit risk and repricing risk. Explain both types of risks.

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going up, the position outcome would be:

Swap rates are derived from the yield curves in each major currency.

A basis point is one-tenth of one percent.

Which of the following would be considered an example of a currency swap?

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 Currency Derivatives: Futures and Options

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

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Exam 8: Interest Risk and Swaps

An agreement to swap the currencies of a debt service obligation would be termed a/an:

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

For a corporate borrower, it is especially important to distinguish between credit risk and repricing risk. Explain both types of risks.

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going up, the position outcome would be:

Swap rates are derived from the yield curves in each major currency.

A basis point is one-tenth of one percent.

Which of the following would be considered an example of a currency swap?

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 Currency Derivatives: Futures and Options

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters