Question 1

A currency swap has more counterparty risk than an interest-rate swap because

Accepted Answer

A)  Unlike an interest rate swap, the counterparties are usually in different countries, making the swap vulnerable to different legal systems. 
B)  Unlike an interest rate swap, the currency swap also involves an exchange and re-exchange of principal amounts, making the swap vulnerable to movements in exchange rates. 
C)  Foreign exchange markets have more credit risk than interest rate markets. 
D)  Each counterparty is less likely to default in its home currency than in a foreign currency. 
A)  Unlike an interest rate swap, the counterparties are usually in different countries, making the swap vulnerable to different legal systems. 
B)  Unlike an interest rate swap, the currency swap also involves an exchange and re-exchange of principal amounts, making the swap vulnerable to movements in exchange rates. 
C)  Foreign exchange markets have more credit risk than interest rate markets. 
D)  Each counterparty is less likely to default in its home currency than in a foreign currency.

Question 2

You are an active currency trader in the dollar versus euro market. The current market quote ($/€) is 1.51-1.53. You determine the difference between the spot exchange rate and forward exchange rate using the forward points in the market. If dollar interest rates are lower than that of the euro, which of the following scenarios relating to forward exchange points is most valid in determining the forward exchange rate?

Accepted Answer

A)  Add the following bid-ask points to spot to get the forward exchange rate: 10-13. 
B)  Subtract the following bid-ask points to spot to get the forward exchange rate: 10-13. 
C)  Add the following bid-ask points to spot to get the forward exchange rate: 13-10. 
D)  Subtract the following bid-ask points to spot to get the forward exchange rate: 13-10. 
A)  Add the following bid-ask points to spot to get the forward exchange rate: 10-13. 
B)  Subtract the following bid-ask points to spot to get the forward exchange rate: 10-13. 
C)  Add the following bid-ask points to spot to get the forward exchange rate: 13-10. 
D)  Subtract the following bid-ask points to spot to get the forward exchange rate: 13-10.

Question 3

You are an active currency trader in the dollar versus euro market. The current market quote ($/€) is 1.51-1.55. However, you believe the dollar will appreciate versus the euro. Which of the following quotes is the most likely one you will present to the market given your views?

Accepted Answer

A)  1.52-1.56 
B)  1.50-1.54 
C)  1.50-1.57 
D)  1.52-1.54 
A)  1.52-1.56 
B)  1.50-1.54 
C)  1.50-1.57 
D)  1.52-1.54

Question 4

Forward points (bid and ask) in the currency market reflect

Accepted Answer

A)  The interest differential between the two currencies. 
B)  Which currency is at a higher interest rate. 
C)  Both (a) and (b). 
D)  Neither (a) nor (b). 
A)  The interest differential between the two currencies. 
B)  Which currency is at a higher interest rate. 
C)  Both (a) and (b). 
D)  Neither (a) nor (b).

Question 5

ABC, a US-based corporation enters into a currency basis swap with XYZ, a British company, in which the initial principal amounts are $200 million and £ 100 million. That is: 
-At inception, there is an initial principal exchange in which ABC pays XYZ $200 million and receives £ 100 million.
-Subsequently, at each interest payment date ABC pays XYZ the GBP-Libor rate on £ 100 million, and receives the USD-Libor rate on $200 million.
-Fnally, at maturity, a re-exchange of principals occurs in which ABC pays XYZ £ 100 million in exchange for $200 million.
Suppose the spot exchange rate is $1.55 = £ 1 at the time of entering into the swap. Assume that ABC and XYZ both have AA credit ratings at this time and can access funds at Libor flat. Then, from a credit perspective,

Accepted Answer

A)  ABC is carrying more counterparty risk than XYZ. 
B)  ABC is carrying less counterparty risk than XYZ. 
C)  Both sides are carrying the same credit risk. 
D)  Neither side is carrying any credit risk. 
A)  ABC is carrying more counterparty risk than XYZ. 
B)  ABC is carrying less counterparty risk than XYZ. 
C)  Both sides are carrying the same credit risk. 
D)  Neither side is carrying any credit risk.

A currency swap has more counterparty risk than an interest-rate swap because

You are an active currency trader in the dollar versus euro market. The current market quote ($/€) is 1.51-1.55. However, you believe the dollar will appreciate versus the euro. Which of the following quotes is the most likely one you will present to the market given your views?

Forward points (bid and ask) in the currency market reflect

Overview

Futures Markets

Pricing Forwards and Futures I

Pricing Forwards Futures II

Hedging With Futures Forwards

Interest-Rate Forwards Futures

Options Markets

Options: Payoffs Trading Strategies

No-Arbitrage Restrictions

Early-Exercise Put-Call Parity

Option Pricing: an Introduction

Binomial Option Pricing

Implementing the Binomial Model

The Black-Scholes Model

Mathematics of Black-Scholes

Beyond Black-Scholes

The Option Greeks

Path-Independent Exotic Options

Exotic Options II: Path-Dependent Options

Value at Risk

Swaps and Floating Rate Products

Equity Swaps

Term Structure of Interest Rates: Concepts

Estimating the Yield Curve

Modeling Term Structure Movements

Factor Models of the Term Structure

The Heath-Jarrow-Morton HJM and Libor Market Model LMM

Credit Derivative Products

Structural Models of Default Risk

Reduced-Form Models of Default Risk

Modeling Correlated Default

Filters

Exam 23: Currency and Commodity Swaps

A currency swap has more counterparty risk than an interest-rate swap because

You are an active currency trader in the dollar versus euro market. The current market quote ($/€) is 1.51-1.55. However, you believe the dollar will appreciate versus the euro. Which of the following quotes is the most likely one you will present to the market given your views?

Forward points (bid and ask) in the currency market reflect

Overview

Futures Markets

Pricing Forwards and Futures I

Pricing Forwards Futures II

Hedging With Futures Forwards

Interest-Rate Forwards Futures

Options Markets

Options: Payoffs Trading Strategies

No-Arbitrage Restrictions

Early-Exercise Put-Call Parity

Option Pricing: an Introduction

Binomial Option Pricing

Implementing the Binomial Model

The Black-Scholes Model

Mathematics of Black-Scholes

Beyond Black-Scholes

The Option Greeks

Path-Independent Exotic Options

Exotic Options II: Path-Dependent Options

Value at Risk

Swaps and Floating Rate Products

Equity Swaps

Term Structure of Interest Rates: Concepts

Estimating the Yield Curve

Modeling Term Structure Movements

Factor Models of the Term Structure

The Heath-Jarrow-Morton HJM and Libor Market Model LMM

Credit Derivative Products

Structural Models of Default Risk

Reduced-Form Models of Default Risk

Modeling Correlated Default

Filters