Question 1

If a financial manager with an interest liability on a future date were to sell Futures and interest rates end up going down,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. B

Question 2

A basis point is one-tenth of one percent.

Accepted Answer

A) True 
 B)False  False

Question 3

If a financial manager earning interest on a future date were to buy 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. C

Question 4

The London Interbank Offered Rate (LIBOR)is published under the auspices of the British Bankers Association.A panel of 16 major multinational banks self-report their actual borrowing rate.

Accepted Answer

A) True 
 B)False

Question 5

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 6

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

Accepted Answer

A) True 
 B)False

Question 7

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 #3 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 8

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 9

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 r

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

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.After the fact,under which set of circumstances would you prefer strategy #2? (Assume your firm is borrowing money.)

Accepted Answer

A)  Your credit rating stayed the same and interest rates went up. 
B)  Your credit rating stayed the same and interest rates went down. 
C)  Your credit rating improved and interest rates went down. 
D)  Not enough information to make a judgment. 
A)  Your credit rating stayed the same and interest rates went up. 
B)  Your credit rating stayed the same and interest rates went down. 
C)  Your credit rating improved and interest rates went down. 
D)  Not enough information to make a judgment.

Question 12

A swap agreement may involve currencies or interest rates,but never both.

Accepted Answer

A) True 
 B)False

Question 13

An agreement to swap a fixed interest payment for a floating interest payment would be considered 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 14

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 15

Your firm is faced with paying a variable rate debt obligation with the expectation that interest rates are likely to go up.Identify two strategies using interest rate futures and interest rate swaps that could reduce the risk to the firm.

Accepted Answer

Sell a futures position.If rates change

Question 16

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:

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 17

One of the reasons companies use interest rate swaps is because they pursue a target debt structure that combines maturity,currency of composition,and fixed/floating pricing.

Accepted Answer

A) True 
 B)False

Question 18

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.

Question 19

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.After the fact,under which set of circumstances would you prefer strategy #3? (Assume your firm is borrowing money.)

Accepted Answer

A)  Your credit rating stayed the same and interest rates went up. 
B)  Your credit rating stayed the same and interest rates went down. 
C)  Your credit rating improved and interest rates went down. 
D)  Not enough information to make a judgment. 
A)  Your credit rating stayed the same and interest rates went up. 
B)  Your credit rating stayed the same and interest rates went down. 
C)  Your credit rating improved and interest rates went down. 
D)  Not enough information to make a judgment.

Question 20

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

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

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

A basis point is one-tenth of one percent.

If a financial manager earning interest on a future date were to buy Futures and interest rates end up going up,the position outcome would be:

The London Interbank Offered Rate (LIBOR)is published under the auspices of the British Bankers Association.A panel of 16 major multinational banks self-report their actual borrowing rate.

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

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

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:

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

A swap agreement may involve currencies or interest rates,but never both.

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

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:

Your firm is faced with paying a variable rate debt obligation with the expectation that interest rates are likely to go up.Identify two strategies using interest rate futures and interest rate swaps that could reduce the risk to the firm.

One of the reasons companies use interest rate swaps is because they pursue a target debt structure that combines maturity,currency of composition,and fixed/floating pricing.

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

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

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

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 8: Interest Risk and Swaps

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

A basis point is one-tenth of one percent.

If a financial manager earning interest on a future date were to buy Futures and interest rates end up going up,the position outcome would be:

The London Interbank Offered Rate (LIBOR)is published under the auspices of the British Bankers Association.A panel of 16 major multinational banks self-report their actual borrowing rate.

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

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

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:

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

A swap agreement may involve currencies or interest rates,but never both.

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

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:

Your firm is faced with paying a variable rate debt obligation with the expectation that interest rates are likely to go up.Identify two strategies using interest rate futures and interest rate swaps that could reduce the risk to the firm.

One of the reasons companies use interest rate swaps is because they pursue a target debt structure that combines maturity,currency of composition,and fixed/floating pricing.

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

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

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

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