CHAPTER 9 SUGGESTED ANSWERS TO CHAPTER 9 QUESTIONS

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "CHAPTER 9 SUGGESTED ANSWERS TO CHAPTER 9 QUESTIONS"

Transcription

1 INSTRUCTOR S MANUAL MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 9 SUGGESTED ANSWERS TO CHAPTER 9 QUESTIONS 1. What is an interest rate swap? What is the difference between a basis swap and a coupon swap? ANSWER. An interest rate swap is an agreement between two parties to exchange interest payments in the same currency for a specific maturity on an agreed upon notional amount. The term notional refers to the theoretical principal underlying the swap. In the coupon swap, one party pays a fixed rate calculated at the time of trade as a spread to a particular Treasury bond, while the other side pays a floating rate that resets periodically throughout the life of the deal against a designated index. In a basis swap, a floating-rate liability tied to one reference rate, say, LIBOR, is exchanged for a floating rate-liability with another reference rate, say, 90-day Treasury bills. Thus, coupon swaps convert fixed-rate debt into floating-rate debt (or vice versa), whereas the basis swap converts one type of floating-rate debt into another type of floating-rate debt. 2. What is a currency swap? ANSWER. A currency swap involves the exchange of principal plus interest payments in one currency for equivalent payments in another currency. 3. Comment on the following statement. "In order for one party to a swap to benefit, the other party must lose." ANSWER. Given that both parties to the swap freely enter into the swap transaction, both must perceive benefits. The tax, financial market, and regulatory system arbitrage benefits associated with swaps are shared by both parties. 4. The Swiss Central Bank bans the use of Swiss francs for Eurobond issues. Explain how currency swaps can be used to enable foreign borrowers who want to raise Swiss francs through a bond issue outside of Switzerland to get around this ban. ANSWER. Foreign borrowers can issue Eurodollar bonds and then swap the proceeds for Swiss francs. In this way, they can raise Swiss francs without violating the ban on issuing Swiss franc Eurobonds. 5. Explain how IBM can use a forward rate agreement to lock in the cost of a one-year $25 million loan to be taken out in six months. Alternatively, explain how IBM can lock in the interest rate on this loan by using Eurodollar futures contracts. What is the major difference between using the FRA and the futures contract to hedge IBM s interest rate risk? ANSWER. To lock in the rate on a one-year $25 million loan to be taken out in six months, IBM could buy a "6 x 12" FRA on LIBOR for a notional principal of $25 million. This means that IBM has entered into a six-month forward contract on 12-month LIBOR. Alternatively, IBM can lock in the interest rate on this loan by selling 25 $1 million 6-month futures contracts. However, this transaction will only protect IBM for the first three months of its loan. To hedge the remaining nine months of future loan, IBM would have to sell 25 $1 million 9-month, 12- month, and 15-month futures contracts. The most important difference between using the FRA and the futures contract is that is that the latter is marked to market daily, meaning that gains and losses are settled in cash each day. In addition, the FRA involves entering into just one contract for the 12-month loan, whereas using the futures contract to hedge IBM s interest rate risk involves entering into four separate three-month futures contracts. ADDITIONAL CHAPTER 9 QUESTIONS AND ANSWERS 1. What factors underlie the economic benefits of swaps? 1

2 CHAPTER 9: SWAPS AND INTEREST RATE DERIVATIVES ANSWER. For swaps to provide economic benefits, they must allow the transacting parties to engage in some form of tax, regulatory system, or financial market arbitrage. Thus, underlying the economic benefits of swaps are barriers that prevent other forms of arbitrage from functioning fully. This impediment must take the form of legal restrictions on spot and forward foreign exchange transactions, different perceptions by investors of risk and creditworthiness of the two parties, appeal or acceptability of one borrower to a certain class of investor, tax differentials, and so forth. If the world capital market were fully integrated, the incentive to swap would be reduced because fewer arbitrage opportunities would exist. 2. Comment on the following statement. "During the period , Japanese companies issued some $115 billion of bonds with warrants attached. Nearly all were issued in dollars. The dollar bonds usually carried coupons of 4% or less; by the time the Japanese companies swapped that exposure into yen (whose interest rate was as much as five percentage points lower than the dollar's), their cost of capital was zero or negative." ANSWER. This statement assumes that the warrants on these Japanese bonds, which are long-dated call options, are costless for the Japanese firms to issue. They are not. During this period, Japanese stock prices rose dramatically. The net result was that Japanese firms did not issue cheap debt; instead, they issued expensive equity. That is, they issued equity at the exercise price on the warrants, which was typically far below the price at which they could have sold new stock in the marketplace. 3. Explain how Cisco Systems can use arbitrage to create a forward forward to fix the interest rate on a threemonth $10 million loan to be taken out in nine months. The loan will be priced off LIBOR. ANSWER. Cisco can lock in a three-month rate on a $10 million loan to be taken out in nine months by buying a forward forward or by creating its own through arbitrage. Specifically, Cisco can derive a nine-month forward rate on LIBOR3 by simultaneously lending the present value of $10 million for nine months and borrowing that same amount of money for 12 months. 4. Why do governments provide subsidized financing for some investments? ANSWER. Governments use subsidized financing to encourage programs and activities that are deemed to be worthy. For example, governments provide subsidized trade financing to boost exports and low-cost financing to projects expected to create jobs in regions with high unemployment. Often, these subsidies offset regulatory and other costs that are imposed on companies by the same governments. SUGGESTED SOLUTIONS TO CHAPTER 9 PROBLEMS 1. Dell Computers would like to borrow pounds, and Virgin Airlines wants to borrow dollars. Because Dell is better known in the United States, it can borrow on its own dollars at 7 percent and pounds at 9 percent, whereas Virgin can on its own borrow dollars at 8 percent and pounds at 8.5% a. Suppose Dell wants to borrow 10 million for two years, Virgin wants to borrow $16 million for two years, and the current ($/ ) exchange rate is $1.60. What swap transaction would accomplish this objective? Assume the counterparties would exchange principal and interest payments with no rate adjustments. ANSWER. Virgin would borrow 10 million for two years and Dell would borrow $16 million for two years. The two companies would then swap their proceeds and payment streams. b. What savings are realized by Dell and Virgin? ANSWER. Assuming no interest rate adjustments, Dell would pay 8.5% on the 10 million and Virgin would pay 7% on its $16 million. Given that its alternative was to borrow pounds at 9%, Dell would save 0.5% on its borrowings, or an annual savings of 50,000. Similarly, Virgin winds up paying an interest rate of 7% instead of 8% on its dollar borrowings, saving it 1% or $160,000 annually. 2

3 INSTRUCTOR S MANUAL MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. c. Suppose, in fact, that Dell can borrow dollars at 7 percent and pounds at 9 percent, whereas Virgin can borrow dollars at 8.75 percent and pounds at 9.5 percent. What range of interest rates would make this swap attractive to both parties? ANSWER. Ignoring credit risk differences, Virgin would have to provide Dell with a pound rate of less than 9%. Given that Virgin has to borrow the pounds at 9.5%, it would have to save at least 0.5% on its dollar borrowing from Dell to make the swap worthwhile. If Dell borrows pounds from Virgin at 9% - x. then Virgin would have to borrow dollars from Dell at 8.75% - (0.5% + x) to cover the 0.5% + x difference between the interest rate at which it was borrowing pounds and the interest rate at which it was lending those pounds to Dell. d. Based on the scenario in part (c), suppose Dell borrows dollars at 7 percent and Virgin borrows pounds at 9.5 percent. If the parties swap their current proceeds, with Dell paying 8.75 percent to Virgin for pounds and Virgin paying 7.75 percent to Dell for dollars, what are the cost savings to each party? ANSWER. Under this scenario, Dell saves 0.25% on its pound borrowings and earns 0.75% on the dollars it swaps with Virgin, for a total benefit of 1% annually. Virgin loses 0.75% on the pounds it swaps with Dell and saves 1% on the dollars it receives from Dell, for a net savings of 0.25% annually. 2. In May 1988, Walt Disney Productions sold to Japanese investors a 20-year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6 percent (the return required by the Japanese investors), was 93 billion. Disney took the yen proceeds from the sale, converted them to dollars, and invested the dollars in bonds yielding 10 percent. According to Disney's chief financial officer, Gary Wilson, "In effect, we got money at a 6 percent discount rate, reinvested it at 10 percent, and hedged our royalty stream against yen fluctuations--all in one transaction." a. At the time of the sale, the exchange rate was 124 = $1. What dollar amount did Disney realize from the sale of its yen proceeds? ANSWER. Disney realized 93,000,000,000/124 = $750,000,000 from the sale of its future yen proceeds. b. Demonstrate the equivalence between Walt Disney's transaction and a currency swap. (Hint: A diagram would help.) ANSWER. In a currency/interest rate swap, one party trades a stream of payments in one currency, at one interest rate, for a stream of payments in a second currency, at a second interest rate. Disney's stream of yen royalties can be treated as a yen bond, which it traded for a dollar bond, with dollar payments. The only difference between the Disney swap and a traditional swap is that the latter usually involve cash outflows whereas the Disney swap involves cash inflows. c. Comment on Gary Wilson's statement. Did Disney achieve the equivalent of a free lunch through its transaction? ANSWER. Gary Wilson is committing the economist's unpardonable sin: He is comparing apples with oranges, in this case, a 6% yen interest rate with a 10% dollar interest rate. The international Fisher effect tells us that the most likely reason that the yen interest rate is 4 percentage points less than the equivalent dollar interest rate is because the market expects the dollar to depreciate by about 4% annually against the yen. 3. Suppose that IBM would like to borrow fixed-rate yen, whereas Korea Development Bank (KDB) would like to borrow floating-rate dollars. IBM can borrow fixed-rate yen at 4.5 percent or floating-rate dollars at LIBOR percent. KDB can borrow fixed-rate yen at 4.9 percent or floating-rate dollars at LIBOR percent. a. What is the range of possible cost savings that IBM can realize through an interest rate/currency swap with KDB? ANSWER. The cost to each party of accessing either the fixed-rate yen or the floating-rate dollar market for a new debt issue is as follows: 3

4 CHAPTER 9: SWAPS AND INTEREST RATE DERIVATIVES Borrower Fixed-Rate Yen Available Floating-Rate Dollars Available Korea Development Bank 4.9% LIBOR % IBM 4.5% LIBOR % Difference 0.4% 0.55% Given the differences in rates between the two markets, the two parties can achieve a combined 15 basis point savings through IBM borrowing floating-rate dollars at LIBOR % and KDB borrowing fixed-rate yen at 4.9% and then swapping the proceeds. IBM would be able to borrow fixed-rate yen at 4.35% if all these savings were passed along to it in the swap. This could be accomplished by IBM providing KDB with floating-rate dollars at LIBOR %, saving KDB 0.55%, which then passed these savings along to IBM by swapping the fixed-rate yen at 4.9% % = 4.35%. Thus, the potential savings to IBM range from 0 to 0.15%. b. Assuming a notional principal equivalent to $125 million, and a current exchange rate of 105/$, what do these possible cost savings translate into in yen terms? ANSWER. At a current exchange rate of 105/$, IBM's borrowing would equal 13,125,000,000 (125,000,000*105). A 0.15% savings on that amount would translate into 19,687,500 per annum ( 13,125,000,000*0.0015). c. Redo Parts a and b assuming that the parties use Bank of America, which charges a fee of 8 basis points to arrange the swap. ANSWER. In this case, the potential savings from a swap net out to 7 basis points. If IBM realizes all these savings, its borrowing cost would be lowered to 4.43% (4.5% %). The 7 basis point saving would translate into an annual saving of 9,187,500 ( 13,125,000,000*0.0007). 4. At time t, 3M borrows 12.8 billion at an interest rate of 1.2 percent, paid semiannually, for a period of two years. It then enters into a two-year yen/dollar swap with Bankers Trust (BT) on a notional principal amount of $100 million ( 12.8 billion at the current spot rate). Every six months, 3M pays BT U.S. dollar LIBOR6, while BT makes payments to 3M of 1.3 percent annually in yen. At maturity, BT and 3M reverse the notional principals. a. Assume that LIBOR6 (annualized) and the /$ exchange rate evolve as follows. Calculate the net dollar amount that 3M pays to BT ("-") or receives from BT ("+") each six-month period. Time (months) LIBOR6 /$ (spot) Net $ receipt (+)/payment (-) t 5.7% 128 t % 132 t % 137 t % 131 t % 123 ANSWER. The semiannual receipts, payments, and net receipts (payments) are computed as follows: Time (months) LIBOR6 /$ (spot) Receipt Payment Net $ receipt (+)/payment (-) t 5.70% 128 t % 132 $630,303 $2,700,000 $2,069,697 t % 137 $607,299 $2,650,000 $2,042,701 t % 131 $635,115 $2,950,000 $2,314,885 t % 123 $676,423 $2,900,000 $2,223,577 There is no payment or receipt at time t. The semiannual payment is calculated as $100,000,000 x LIBOR6/2. The semiannual receipt is calculated as 12,800,000,000 x 0.013/2 x 1/S, where S is the current spot rate ( /$). 4

5 INSTRUCTOR S MANUAL MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. b. What is the all-in dollar cost of 3M's loan? ANSWER. The net payments made semiannually by 3M are shown in the table below. The net payment is computed as the LIBOR6 payment made to BT less the dollar value of the 0.05% semiannual difference between the yen interest received and the yen interest paid (shown in the column labeled Receipt. ) Time (months) LIBOR6 /$ (spot) Receipt Payment Net payment T 5.70% 128 -$100,000,000 T % 132 $48,485 $2,700,000 $2,651,515 T % 137 $46,715 $2,650,000 $2,603,285 T % 131 $48,855 $2,950,000 $2,901,145 t % 123 $52,033 $2,900,000 $102,847,967 IRR 2.75% Annualized 5.50% c. Suppose 3M decides at t + 18 to use a six-month forward contract to hedge the t + 24 receipt of yen from BT. Six-month interest rates (annualized) at t + 18 are 5.9% in dollars and 2.1% in yen. With this hedge in place, what fixed dollar amount would 3M have paid (received) at time t + 24? How does this amount compare to the t + 24 net payment computed in part a? ANSWER. Given the interest rates presented in the problem, we can use interest rate parity to compute the 6-month forward rate at time t + 18 as /$: f 180 = 131x = M will pay out $2.9 million (0.059/2 x $100,000,000) and receive $647,056 (0.013/2 x 12,800,000 x 1/128.58). The latter figure is calculated by converting its yen receipt into dollars at the forward rate of /$. 3M s net payment equals $2,252,944 ($2,900,000 - $647,056). This amount is $29,367 more than the net payment of $2,223,577 it would have made otherwise. d. Does it make sense for 3M to hedge its receipt of yen from BT? Explain. ANSWER. No. As it now stands, 3M receives yen and pays out yen, resulting in a zero net exposure on the swap (aside from the net 0.05% semiannual yen receipt). Hedging would expose 3M to currency risk and negate the purpose of the cross-currency swap, which is to allow 3M to engage in arbitrage while being shielded from currency risk. 5. Suppose LIBOR3 is 7.93 percent and LIBOR6 is 8.11 percent. What is the forward forward rate for a LIBOR3 deposit to be placed in three months? ANSWER. Through arbitrage, the future value in six months of $1 invested today must be the same whether we invest at LIBOR3 today and enter into a forward forward for the following three months or invest at LIBOR6 today. That is, (1 + LIBOR3/4)(1 + r/4) = 1 + LIBOR6/2 where r equals the forward forward rate for a LIBOR3 deposit to be placed in three months. Substituting in numbers from the problem, we have (1 + r/4) = Solving this equation yields r = 8.13%. 5

6 CHAPTER 9: SWAPS AND INTEREST RATE DERIVATIVES 6. Suppose that Skandinaviska Ensilden Banken (SEB), the Swedish bank, funds itself with three-month Eurodollar time deposits at LIBOR. Assume that Alfa Laval comes to SEB seeking an one-year, fixed-rate loan of $10 million, with interest to be paid quarterly. At the time of the loan disbursement, SEB raises three-month funds at 5.75%, but has to roll over this funding in three successive quarters. If it does not lock in a funding rate and interest rates rise, the loan could prove to be unprofitable. The three quarterly re-funding dates fall shortly before the next three Eurodollar futures-contract expirations in March, June, and September. a. At the time the loan is made, the price of each contract is 94.12, 93.95, and Show how SEB can use Eurodollar futures contracts to lock in its cost of funds for the year. What is SEB's hedged cost of funds for the year? ANSWER. The formula for the locked-in LIBOR, r, given a price P of a Eurodollar futures contract is r = P. Using this formula, the solution r for each of the contracts is 5.82%, 6.05%, and 6.2%. So SEB can lock in a cost for its $10 million loan equal to $10,000,000 x ( /4)( /4)( )( /4) = $10,608,927, which is equivalent to a one-year fixed interest rate of 6.09%. Effectively, what this procedure does is to roll over the principal and cumulative interest payment each quarter until it is paid off in a lump sum at the end of the fourth quarter. b. Suppose that the settlement prices of the March, June, and September contracts are, respectively, 92.98, 92.80, and What would have been SEB's unhedged cost of funding the loan to Alfa Laval? ANSWER. We can solve this problem by using the insight that at the time of settlement, arbitrage will ensure that the settlement price for a Eurodollar futures contract will be virtually identical to the actual LIBOR on that date. Given the stated prices at settlement, actual LIBOR on each rollover date was 7.02%, 7.2%, and 7.34%. Based on these figures, the unhedged cost of the loan is $10,000,000 x ( /4)( /4)( /4)( /4) = $10,700,379. This is equivalent to an annual rate of 7.00%, or 91 basis points more than the hedged cost of the loan. ADDITIONAL CHAPTER 9 PROBLEMS AND SOLUTIONS 1. Company A, a low-rated firm, desires a fixed-rate, long-term loan. A currently has access to floating interest rate funds at a margin of 1.5% over LIBOR. Its direct borrowing cost is 13% in the fixed-rate bond market. In contrast, company B, which prefers a floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 11% and floating-rate funds at LIBOR + ½%. a. How can A and B use a swap to advantage? ANSWER. Based on the numbers presented, there is an anomaly between the two markets: One judges that the difference in credit quality between the two firms is worth 200 basis points, whereas the other determines that this difference is worth only 100 basis points. The parties can share among themselves the difference of 100 basis points by engaging in a currency swap. This transaction would involve A borrowing floating-rate funds and B borrowing fixed-rate funds and then swapping the proceeds. b. Suppose they split the cost savings. How much would A pay for its fixed-rate funds? How much would B pay for its floating-rate funds? ANSWER. If they split the cost savings, the resulting costs to the two parties would be 12.5% for A and LIBOR for B, calculated as follows: Party Normal Funding Cost Cost After Swap Difference Counterparty A Counterparty B 13.00% LIBOR + 1/2% LIBOR Total.50%.50% 1.00% 6

7 INSTRUCTOR S MANUAL MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. 2. Square Corp. has not tapped the Swiss-franc public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating-rate dollar borrower, which it can be at LIBOR + 3/8%. Circle Corp. has a strong preference for fixed-rate Swiss-franc debt, but it must pay ½ of 1% more than the 5 1/4% coupon that Square Corp.'s notes would carry. Circle Corp., however, can obtain Eurodollars at LIBOR flat (a zero margin). What is the range of possible cost savings to Square from engaging in a currency swap with Circle? ANSWER. Square Corp. can borrow fixed-rate Swiss francs at 5.25% and floating-rate dollars at LIBOR + 3/8%. Meanwhile Circle Corp. can borrow fixed-rate Swiss francs at 5.75% and floating-rate dollars at LIBOR flat. The logical set of transactions under these circumstances would be (1) Square borrows fixed-rate francs, (2) Circle borrows floating-rate dollars, and (3) the companies then swap the payment streams. The maximum benefit to Square arises when it provides fixed- rate francs to Circle at 5.75% (Circle is no worse off under this scenario) and receives floating-rate dollars at LIBOR, which is Circle's cost of funds (Circle is again no worse off under this scenario). This swap will cut Square's cost of funds to LIBOR - 0.5%, which is a savings of 0.875%. At worst, Square will receive no benefit from the swap (otherwise it will not enter into it). Thus, the range of possible cost savings to Square from engaging in a currency swap with Circle is from 0% up to 0.875%. 3. Nestle rolls over a $25 million loan priced at LIBOR3 on a three-month basis. The company feels that interest rates are rising and that rates will be higher at the next roll-over date in three months. Suppose the current LIBOR3 is %. a. Explain how Nestle can use an FRA at 6% from Credit Suisse to reduce its interest rate risk on this loan. ANSWER. Nestle can use the FRA priced at 6% to lock in today LIBOR3 of 6% at its next rollover date three months from now. Whatever happens to LIBOR3 at the rollover date, Nestle will pay LIBOR3 of 6% in three months time. b. In three months, interest rates have risen to 6.25%. How much will Nestle receive/pay on its FRA? What will be Nestle's hedged interest expense for the upcoming three-month period? ANSWER. According to Equation 9.1 in the chapter, Nestle will receive an amount of interest (it will be a recipient because LIBOR3 on the rollover date exceeds the rate agreed to on its FRA) computed as follows: days (LIBOR - forward rate)( ) Interest payment= notional principalx 360 days 1+ LIBORx( ) 360 Substituting in the figures from the problem yields an interest payment from Credit Suisse of $15,385: Interest payment = $25,000,000x 90 ( )( ) 360 = $15, x( ) 360 c. After three months, interest rates have fallen to 5.25%. How much will Nestlé receive/pay on its FRA? What will be Nestle s hedged interest expense for the next three-month period? 7

8 CHAPTER 9: SWAPS AND INTEREST RATE DERIVATIVES ANSWER. Under this interest rate scenario, Nestle must pay to Credit Suisse an amount equal to $46,268: 4. Ford has a $20 million Eurodollar deposit maturing in two months that it plans to roll over for a further six months. The company's treasurer feels that interest rates will be lower in two months time when rolling over the deposit. Suppose the current LIBOR6 is 7.875%. a. Explain how Ford can use an FRA at 7.65% from Banque Paribas to lock in a guaranteed six-month deposit rate when it rolls over its deposit in two months. ANSWER. Ford today can enter into the FRA and guarantee itself a six-month deposit rate in two months time of 7.65%. Specifically, Ford will sell a "2 x 6" FRA on LIBOR at 7.65% to Banque Paribas for a notional principal of $20 million. This means that Banque Paribas Trust has entered into a two-month forward contract on six-month LIBOR. Two months from now, if LIBOR6 is less than 7.65%, Banque Paribas will pay Ford the difference in interest expense. If LIBOR6 exceeds 7.65%, Ford will pay Banque Paribas the difference. b. After two months, LIBOR6 has fallen to 7.5%. How much will Ford receive/pay on its FRA? What will be Ford's hedged deposit rate for the next six-month period? ANSWER. In this case, Ford will receive from Banque Paribas $20,000,000 x ( )/2 = $15,000, giving it an annualized hedged deposit rate of 7.65% for the next six months. c. In two months, LIBOR6 has risen to 8%. How much will Ford receive/pay on its FRA? What will be Ford's hedged deposit rate for the next six months? ANSWER. In this case, Ford will pay Banque Paribas $20,000,000 x ( )/2 = $35,000, giving it as before an annualized hedged deposit rate of 7.65% for the next six months. 8

2 Stock Price. Figure S1.1 Profit from long position in Problem 1.13

2 Stock Price. Figure S1.1 Profit from long position in Problem 1.13 Problem 1.11. A cattle farmer expects to have 12, pounds of live cattle to sell in three months. The livecattle futures contract on the Chicago Mercantile Exchange is for the delivery of 4, pounds of cattle.

More information

INTEREST RATE SWAP (IRS)

INTEREST RATE SWAP (IRS) INTEREST RATE SWAP (IRS) 1. Interest Rate Swap (IRS)... 4 1.1 Terminology... 4 1.2 Application... 11 1.3 EONIA Swap... 19 1.4 Pricing and Mark to Market Revaluation of IRS... 22 2. Cross Currency Swap...

More information

CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS

CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS. On April, the spot price of the British pound was $.86 and the price of the June futures

More information

Advanced forms of currency swaps

Advanced forms of currency swaps Advanced forms of currency swaps Basis swaps Basis swaps involve swapping one floating index rate for another. Banks may need to use basis swaps to arrange a currency swap for the customers. Example A

More information

CHAPTER 11 CURRENCY AND INTEREST RATE FUTURES

CHAPTER 11 CURRENCY AND INTEREST RATE FUTURES Answers to end-of-chapter exercises ARBITRAGE IN THE CURRENCY FUTURES MARKET 1. Consider the following: Spot Rate: $ 0.65/DM German 1-yr interest rate: 9% US 1-yr interest rate: 5% CHAPTER 11 CURRENCY

More information

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Explain the basic differences between the operation of a currency

More information

Financial-Institutions Management. Solutions 4. 8. The following are the foreign currency positions of an FI, expressed in the foreign currency.

Financial-Institutions Management. Solutions 4. 8. The following are the foreign currency positions of an FI, expressed in the foreign currency. Solutions 4 Chapter 14: oreign Exchange Risk 8. The following are the foreign currency positions of an I, expressed in the foreign currency. Currency Assets Liabilities X Bought X Sold Swiss franc (S)

More information

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support

More information

Learning Curve Interest Rate Futures Contracts Moorad Choudhry

Learning Curve Interest Rate Futures Contracts Moorad Choudhry Learning Curve Interest Rate Futures Contracts Moorad Choudhry YieldCurve.com 2004 Page 1 The market in short-term interest rate derivatives is a large and liquid one, and the instruments involved are

More information

CHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Describe the difference between a swap broker and a swap dealer. Answer:

More information

Interest Rate and Currency Swaps

Interest Rate and Currency Swaps Interest Rate and Currency Swaps Eiteman et al., Chapter 14 Winter 2004 Bond Basics Consider the following: Zero-Coupon Zero-Coupon One-Year Implied Maturity Bond Yield Bond Price Forward Rate t r 0 (0,t)

More information

Finance 350: Problem Set 6 Alternative Solutions

Finance 350: Problem Set 6 Alternative Solutions Finance 350: Problem Set 6 Alternative Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. I. Formulas

More information

8. Eurodollars: Parallel Settlement

8. Eurodollars: Parallel Settlement 8. Eurodollars: Parallel Settlement Eurodollars are dollar balances held by banks or bank branches outside the country, which banks hold no reserves at the Fed and consequently have no direct access to

More information

Learning Curve Forward Rate Agreements Anuk Teasdale

Learning Curve Forward Rate Agreements Anuk Teasdale Learning Curve Forward Rate Agreements Anuk Teasdale YieldCurve.com 2004 Page 1 In this article we review the forward rate agreement. Money market derivatives are priced on the basis of the forward rate,

More information

Understanding Cross Currency Swaps. A Guide for Microfinance Practitioners

Understanding Cross Currency Swaps. A Guide for Microfinance Practitioners Understanding Cross Currency Swaps A Guide for Microfinance Practitioners Cross Currency Swaps Use: A Currency Swap is the best way to fully hedge a loan transaction as the terms can be structured to exactly

More information

Fina4500 Spring 2015 Extra Practice Problems Instructions

Fina4500 Spring 2015 Extra Practice Problems Instructions Extra Practice Problems Instructions: The problems are similar to the ones on your previous problem sets. All interest rates and rates of inflation given in the problems are annualized (i.e., stated as

More information

CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT

CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT PROBLEM SETS 1. In formulating a hedge position, a stock s beta and a bond s duration are used similarly to determine the expected percentage gain or loss

More information

Interest Rate Futures. Chapter 6

Interest Rate Futures. Chapter 6 Interest Rate Futures Chapter 6 1 Day Count Convention The day count convention defines: The period of time to which the interest rate applies. The period of time used to calculate accrued interest (relevant

More information

CHAPTER 13 CURRENCY AND INTEREST RATE SWAPS

CHAPTER 13 CURRENCY AND INTEREST RATE SWAPS CHAPTER 13 CURRENCY AND INTEREST RATE SWAPS Chapter Overview This chapter is about currency and interest rate swaps. It begins by describing the origins of the swap market and the role played by capital

More information

Equity-index-linked swaps

Equity-index-linked swaps Equity-index-linked swaps Equivalent to portfolios of forward contracts calling for the exchange of cash flows based on two different investment rates: a variable debt rate (e.g. 3-month LIBOR) and the

More information

Eurodollar Futures, and Forwards

Eurodollar Futures, and Forwards 5 Eurodollar Futures, and Forwards In this chapter we will learn about Eurodollar Deposits Eurodollar Futures Contracts, Hedging strategies using ED Futures, Forward Rate Agreements, Pricing FRAs. Hedging

More information

Currency and Interest Rate Swaps

Currency and Interest Rate Swaps MWF 3:15-4:30 Gates B01 Final Exam MS&E 247S Fri Aug 15 2008 12:15PM-3:15PM Gates B01 Or Saturday Aug 16 2008 12:15PM-3:15PM Gates B01 Remote SCPD participants will also take the exam on Friday, 8/15 Please

More information

Class Note on Valuing Swaps

Class Note on Valuing Swaps Corporate Finance Professor Gordon Bodnar Class Note on Valuing Swaps A swap is a financial instrument that exchanges one set of cash flows for another set of cash flows of equal expected value. Swaps

More information

Chapter 16: Financial Risk Management

Chapter 16: Financial Risk Management Chapter 16: Financial Risk Management Introduction Overview of Financial Risk Management in Treasury Interest Rate Risk Foreign Exchange (FX) Risk Commodity Price Risk Managing Financial Risk The Benefits

More information

Reading: Chapter 19. 7. Swaps

Reading: Chapter 19. 7. Swaps Reading: Chapter 19 Chap. 19. Commodities and Financial Futures 1. The mechanics of investing in futures 2. Leverage 3. Hedging 4. The selection of commodity futures contracts 5. The pricing of futures

More information

Lecture 12. Options Strategies

Lecture 12. Options Strategies Lecture 12. Options Strategies Introduction to Options Strategies Options, Futures, Derivatives 10/15/07 back to start 1 Solutions Problem 6:23: Assume that a bank can borrow or lend money at the same

More information

International Bond and Money Markets. Quiz Questions. True-False Questions

International Bond and Money Markets. Quiz Questions. True-False Questions Chapter 9 International Bond and Money Markets Quiz Questions True-False Questions 1. The abolition of the Interest Equalization Tax, Regulation M, the cold war, and the US and UK foreign exchange controls

More information

Chapter Review and Self-Test Problems

Chapter Review and Self-Test Problems CHAPTER 22 International Corporate Finance 771 3. The fundamental relationships between international financial variables: a. Absolute and relative purchasing power parity, PPP b. Interest rate parity,

More information

1. Briefly discuss some of the services that international banks provide their customers and the market place.

1. Briefly discuss some of the services that international banks provide their customers and the market place. Page 287-288 QUESTIONS 1. Briefly discuss some of the services that international banks provide their customers and the market place. Answer: International banks can be characterized by the types of services

More information

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS

VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Graduate School of Business Administration University of Virginia VALUATION OF PLAIN VANILLA INTEREST RATES SWAPS Interest-rate swaps have grown tremendously over the last 10 years. With this development,

More information

CFA Level -2 Derivatives - I

CFA Level -2 Derivatives - I CFA Level -2 Derivatives - I EduPristine www.edupristine.com Agenda Forwards Markets and Contracts Future Markets and Contracts Option Markets and Contracts 1 Forwards Markets and Contracts 2 Pricing and

More information

CHAPTER 10. CURRENCY SWAPS

CHAPTER 10. CURRENCY SWAPS CHAPTER 10. CURRENCY SWAPS The advent of swaps, as much as anything else, helped transform the world s segmented capital markets into a single, truly integrated, international capital market. John F. Marshall

More information

Assumptions: No transaction cost, same rate for borrowing/lending, no default/counterparty risk

Assumptions: No transaction cost, same rate for borrowing/lending, no default/counterparty risk Derivatives Why? Allow easier methods to short sell a stock without a broker lending it. Facilitates hedging easily Allows the ability to take long/short position on less available commodities (Rice, Cotton,

More information

Introduction to swaps

Introduction to swaps Introduction to swaps Steven C. Mann M.J. Neeley School of Business Texas Christian University incorporating ideas from Teaching interest rate and currency swaps" by Keith C. Brown (Texas-Austin) and Donald

More information

CHAPTER 12 INTERNATIONAL BOND MARKETS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

CHAPTER 12 INTERNATIONAL BOND MARKETS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS CHAPTER 12 INTERNATIONAL BOND MARKETS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Describe the differences between foreign bonds and Eurobonds. Also discuss why

More information

INTEREST RATE SWAPS September 1999

INTEREST RATE SWAPS September 1999 INTEREST RATE SWAPS September 1999 INTEREST RATE SWAPS Definition: Transfer of interest rate streams without transferring underlying debt. 2 FIXED FOR FLOATING SWAP Some Definitions Notational Principal:

More information

Manual for SOA Exam FM/CAS Exam 2.

Manual for SOA Exam FM/CAS Exam 2. Manual for SOA Exam FM/CAS Exam 2. Chapter 7. Derivatives markets. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall

More information

What are Swaps? Spring 2014. Stephen Sapp

What are Swaps? Spring 2014. Stephen Sapp What are Swaps? Spring 2014 Stephen Sapp Basic Idea of Swaps I have signed up for the Wine of the Month Club and you have signed up for the Beer of the Month Club. As winter approaches, I would like to

More information

CHAPTER 6. Different Types of Swaps 1

CHAPTER 6. Different Types of Swaps 1 CHAPTER 6 Different Types of Swaps 1 In the previous chapter, we introduced two simple kinds of generic swaps: interest rate and currency swaps. These are usually known as plain vanilla deals because the

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common

More information

DERIVATIVES Presented by Sade Odunaiya Partner, Risk Management Alliance Consulting DERIVATIVES Introduction Forward Rate Agreements FRA Swaps Futures Options Summary INTRODUCTION Financial Market Participants

More information

Forward Price. The payoff of a forward contract at maturity is S T X. Forward contracts do not involve any initial cash flow.

Forward Price. The payoff of a forward contract at maturity is S T X. Forward contracts do not involve any initial cash flow. Forward Price The payoff of a forward contract at maturity is S T X. Forward contracts do not involve any initial cash flow. The forward price is the delivery price which makes the forward contract zero

More information

Modeling VaR of Swaps. Dr Nitin Singh IIM Indore (India)

Modeling VaR of Swaps. Dr Nitin Singh IIM Indore (India) Modeling VaR of Swaps Dr Nitin Singh IIM Indore (India) nsingh@iimidr.ac.in Modeling VaR of Swaps @Risk application Palisade Corporation Overview of Presentation Swaps Interest Rate Swap Structure and

More information

Chapter 5 Financial Forwards and Futures

Chapter 5 Financial Forwards and Futures Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment

More information

January 1, Year 1 Equipment... 100,000 Note Payable... 100,000

January 1, Year 1 Equipment... 100,000 Note Payable... 100,000 Illustrations of Accounting for Derivatives Extension of Chapter 11 Web This reading illustrates the accounting for the interest rate swaps in Examples 13 and 14 in Chapter 11. Web problem DERIVATIVE 1

More information

FIXED-INCOME SECURITIES. Chapter 10. Swaps

FIXED-INCOME SECURITIES. Chapter 10. Swaps FIXED-INCOME SECURITIES Chapter 10 Swaps Outline Terminology Convention Quotation Uses of Swaps Pricing of Swaps Non Plain Vanilla Swaps Terminology Definition Agreement between two parties They exchange

More information

CHAPTER 3. FORWARD FOREIGN EXCHANGE

CHAPTER 3. FORWARD FOREIGN EXCHANGE CHAPTER 3. FORWARD FOREIGN EXCHANGE In a forward foreign exchange (FX) contract, two parties contract today for the future exchange of currencies at a forward FX rate. No funds change hands when a typical

More information

This act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers

This act of setting a price today for a transaction in the future, hedging. hedge currency exposure, short long long hedge short hedge Hedgers Section 7.3 and Section 4.5 Oct. 7, 2002 William Pugh 7.3 Example of a forward contract: In May, a crude oil producer gets together with a refiner to agree on a price for crude oil. This price is for crude

More information

Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs.

Derivative Users Traders of derivatives can be categorized as hedgers, speculators, or arbitrageurs. OPTIONS THEORY Introduction The Financial Manager must be knowledgeable about derivatives in order to manage the price risk inherent in financial transactions. Price risk refers to the possibility of loss

More information

Answers to Review Questions

Answers to Review Questions Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual

More information

Financial-Institutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure:

Financial-Institutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure: FIN 683 Professor Robert Hauswald Financial-Institutions Management Kogod School of Business, AU Solutions 1 Chapter 7: Bank Risks - Interest Rate Risks 6. A financial institution has the following market

More information

2. Discuss the implications of the interest rate parity for the exchange rate determination.

2. Discuss the implications of the interest rate parity for the exchange rate determination. CHAPTER 6 INTERNATIONAL PARITY RELATIONSHIPS AND FORECASTING FOREIGN EXCHANGE RATES SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Give a full definition of arbitrage.

More information

Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity

Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity Fixed Income ortfolio Management Interest rate sensitivity, duration, and convexity assive bond portfolio management Active bond portfolio management Interest rate swaps 1 Interest rate sensitivity, duration,

More information

BUSM 411: Derivatives and Fixed Income

BUSM 411: Derivatives and Fixed Income BUSM 411: Derivatives and Fixed Income 2. Forwards, Options, and Hedging This lecture covers the basic derivatives contracts: forwards (and futures), and call and put options. These basic contracts are

More information

19. Interest Rate Swaps

19. Interest Rate Swaps 19. Interest Rate Swaps Reading: Stigum 19 on Swaps. See also Hull who builds from the idea (mentioned in Stigum) that swaps are like a portfolio of forward contracts. Daily Financial Times includes bid-ask

More information

Floating rate Payments 6m Libor. Fixed rate payments 1 300000 337500-37500 2 300000 337500-37500 3 300000 337500-37500 4 300000 325000-25000

Floating rate Payments 6m Libor. Fixed rate payments 1 300000 337500-37500 2 300000 337500-37500 3 300000 337500-37500 4 300000 325000-25000 Introduction: Interest rate swaps are used to hedge interest rate risks as well as to take on interest rate risks. If a treasurer is of the view that interest rates will be falling in the future, he may

More information

Chapter 14 Foreign Exchange Markets and Exchange Rates

Chapter 14 Foreign Exchange Markets and Exchange Rates Chapter 14 Foreign Exchange Markets and Exchange Rates International transactions have one common element that distinguishes them from domestic transactions: one of the participants must deal in a foreign

More information

Determination of Forward and Futures Prices

Determination of Forward and Futures Prices Determination of Forward and Futures Prices Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 2012 Short selling A popular trading (arbitrage) strategy is the shortselling or

More information

Introduction, Forwards and Futures

Introduction, Forwards and Futures Introduction, Forwards and Futures Liuren Wu Zicklin School of Business, Baruch College Fall, 2007 (Hull chapters: 1,2,3,5) Liuren Wu Introduction, Forwards & Futures Option Pricing, Fall, 2007 1 / 35

More information

International Financial Management. Prerequisites

International Financial Management. Prerequisites International Financial Management Prerequisites 1. The quoted interest rate is 5% p.a. What is the effective interest rate for 6 months if the quoted interest rate is a) simple, b) annually compounded,

More information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information

Assignment 10 (Chapter 11)

Assignment 10 (Chapter 11) Assignment 10 (Chapter 11) 1. Which of the following tends to cause the U.S. dollar to appreciate in value? a) An increase in U.S. prices above foreign prices b) Rapid economic growth in foreign countries

More information

CHAPTER 7 SUGGESTED ANSWERS TO CHAPTER 7 QUESTIONS

CHAPTER 7 SUGGESTED ANSWERS TO CHAPTER 7 QUESTIONS INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 7 SUGGESTED ANSWERS TO CHAPTER 7 QUESTIONS 1. Answer the following questions based on data in Exhibit 7.5. a. How many Swiss francs

More information

MCQ on International Finance

MCQ on International Finance MCQ on International Finance 1. If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with a) international monetary credits. b) dollars. c) yuan,

More information

Solutions: Sample Exam 2: FINA 5500

Solutions: Sample Exam 2: FINA 5500 Short Questions / Problems Section: (88 points) Solutions: Sample Exam 2: INA 5500 Q1. (8 points) The following are direct quotes from the spot and forward markets for pounds, yens and francs, for two

More information

Forwards, Futures and Money Market Hedging. Prof. Ian Giddy New York University. Hedging Transactions Exposure. Ongoing transactions exposure

Forwards, Futures and Money Market Hedging. Prof. Ian Giddy New York University. Hedging Transactions Exposure. Ongoing transactions exposure Forwards, Futures and Money-Market Hedging/1 Forwards, Futures and Money Market Hedging Prof. Ian Giddy New York University Hedging Transactions Exposure Types of exposure One-shot exposure Hedging approaches:

More information

Figure S9.1 Profit from long position in Problem 9.9

Figure S9.1 Profit from long position in Problem 9.9 Problem 9.9 Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances

More information

Forward exchange rates

Forward exchange rates Forward exchange rates The forex market consists of two distinct markets - the spot foreign exchange market (in which currencies are bought and sold for delivery within two working days) and the forward

More information

550.444 Introduction to Financial Derivatives

550.444 Introduction to Financial Derivatives 550.444 Introduction to Financial Derivatives Week of October 7, 2013 Interest Rate Futures Where we are Last week: Forward & Futures Prices/Value (Chapter 5, OFOD) This week: Interest Rate Futures (Chapter

More information

CHAPTER 6 ASSET-LIABILITY MANAGEMENT: DETERMINING AND MEASURING INTEREST RATES AND CONTROLLING INTEREST-SENSITIVE AND DURATION GAPS

CHAPTER 6 ASSET-LIABILITY MANAGEMENT: DETERMINING AND MEASURING INTEREST RATES AND CONTROLLING INTEREST-SENSITIVE AND DURATION GAPS CHAPTER 6 ASSET-LIABILITY MANAGEMENT: DETERMINING AND MEASURING INTEREST RATES AND CONTROLLING INTEREST-SENSITIVE AND DURATION GAPS Goals of This Chapter: The purpose of this chapter is to explore the

More information

Interest Rate Swap. Product Disclosure Statement

Interest Rate Swap. Product Disclosure Statement Interest Rate Swap Product Disclosure Statement A Product Disclosure Statement is an informative document. The purpose of a Product Disclosure Statement is to provide you with enough information to allow

More information

DERIVATIVE ADDITIONAL INFORMATION

DERIVATIVE ADDITIONAL INFORMATION DERIVATIVE ADDITIONAL INFORMATION I. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES A. Definitions and Concepts 1. Derivative Instrument A "derivative instrument" is a financial instrument that "derives"

More information

Foreign Currency Exposure and Hedging in Australia

Foreign Currency Exposure and Hedging in Australia Foreign Currency Exposure and Hedging in Australia Anthony Rush, Dena Sadeghian and Michelle Wright* The 213 Australian Bureau of Statistics (ABS) Foreign Currency Exposure survey confirms that Australian

More information

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,

More information

Introduction to Derivative Instruments Part 1 Link n Learn

Introduction to Derivative Instruments Part 1 Link n Learn Introduction to Derivative Instruments Part 1 Link n Learn June 2014 Webinar Participants Elaine Canty Manager Financial Advisory Deloitte & Touche Ireland ecanty@deloitte.ie +353 1 417 2991 Christopher

More information

David Bob Case Scenario

David Bob Case Scenario David Bob Case Scenario David Bob, CFA, is a derivatives analyst at Capital Inc. Capital Inc. deals mainly in arbitrage positions along with leveraged positions. David is following the options prices and

More information

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS

SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS This page indicates changes made to Study Note FM-09-05. April 28, 2014: Question and solutions 61 were added. January 14, 2014:

More information

Futures Price d,f $ 0.65 = (1.05) (1.04)

Futures Price d,f $ 0.65 = (1.05) (1.04) 24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding

More information

Fixed-Income Securities. Assignment

Fixed-Income Securities. Assignment FIN 472 Professor Robert B.H. Hauswald Fixed-Income Securities Kogod School of Business, AU Assignment Please be reminded that you are expected to use contemporary computer software to solve the following

More information

Test 4 Created: 3:05:28 PM CDT 1. The buyer of a call option has the choice to exercise, but the writer of the call option has: A.

Test 4 Created: 3:05:28 PM CDT 1. The buyer of a call option has the choice to exercise, but the writer of the call option has: A. Test 4 Created: 3:05:28 PM CDT 1. The buyer of a call option has the choice to exercise, but the writer of the call option has: A. The choice to offset with a put option B. The obligation to deliver the

More information

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board Condensed Interim Consolidated Financial Statements of Canada Pension Plan Investment Board September 30, 2015 Condensed Interim Consolidated Balance Sheet As at September 30, 2015 As at September 30,

More information

Web. Chapter FINANCIAL INSTITUTIONS AND MARKETS

Web. Chapter FINANCIAL INSTITUTIONS AND MARKETS FINANCIAL INSTITUTIONS AND MARKETS T Chapter Summary Chapter Web he Web Chapter provides an overview of the various financial institutions and markets that serve managers of firms and investors who invest

More information

Fundamentals Level Skills Module, Paper F9

Fundamentals Level Skills Module, Paper F9 Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2008 Answers 1 (a) Rights issue price = 2 5 x 0 8 = $2 00 per share Theoretical ex rights price = ((2 50 x 4) + (1 x 2 00)/5=$2

More information

Mid-Term Exam Practice Set and Solutions.

Mid-Term Exam Practice Set and Solutions. FIN-469 Investments Analysis Professor Michel A. Robe Mid-Term Exam Practice Set and Solutions. What to do with this practice set? To help students prepare for the mid-term exam, two practice sets with

More information

Chapter 15 OPTIONS ON MONEY MARKET FUTURES

Chapter 15 OPTIONS ON MONEY MARKET FUTURES Page 218 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 15 OPTIONS

More information

Paper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants

Paper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants Fundamentals Pilot Paper Skills module Financial Management Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper

More information

CHAPTER 10 MANAGING ACCOUNTING EXPOSURE

CHAPTER 10 MANAGING ACCOUNTING EXPOSURE 120 CHAPTER 10 MANAGING ACCOUNTING EXPOSURE KEY POINTS 1. Hedging cannot provide protection against expected exchange rate changes. Firms ordinarily cope with anticipated currency changes by engaging in

More information

End-of-Chapter Question Solutions CHAPTER 6: TRANSACTION EXPOSURE. 6-1. Tektronix, Inc.: Account Receivable (page 179 in text)

End-of-Chapter Question Solutions CHAPTER 6: TRANSACTION EXPOSURE. 6-1. Tektronix, Inc.: Account Receivable (page 179 in text) 25 CHAPTER 6: TRANSACTION EXPOSURE 6-1. Tektronix, Inc.: Account Receivable (page 179 in text) a) What are the costs of each alternative of hedging a i2,000,000 account receivable due in six months? Remain

More information

Interest Rate Options

Interest Rate Options Interest Rate Options A discussion of how investors can help control interest rate exposure and make the most of the interest rate market. The Chicago Board Options Exchange (CBOE) is the world s largest

More information

Module VII: SWAPS PRODUCT TRAINING FOR INTERNAL USE ONLY NOT TO BE DISTRIBUTED EXTERNALLY MORGAN STANLEY

Module VII: SWAPS PRODUCT TRAINING FOR INTERNAL USE ONLY NOT TO BE DISTRIBUTED EXTERNALLY MORGAN STANLEY Module VII: PRODUCT TRAINING FOR INTERNAL USE ONLY NOT TO BE DISTRIBUTED EXTERNALLY INTEREST RATE An interest rate swap is an agreement between two parties to exchange a fixed payment for a floating payment.

More information

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board Condensed Interim Consolidated Financial Statements of Canada Pension Plan Investment Board December 31, 2015 Condensed Interim Consolidated Balance Sheet As at December 31, 2015 (CAD millions) As at December

More information

CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE

CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE CHAPTER 12 CHAPTER 12 FOREIGN EXCHANGE CHAPTER OVERVIEW This chapter discusses the nature and operation of the foreign exchange market. The chapter begins by describing the foreign exchange market and

More information

Financial Risk Management

Financial Risk Management 176 Financial Risk Management For the year ended 31 December 2014 1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES s major financial instruments include cash and bank balances, time deposits, principal-protected

More information

Practice set #4 and solutions

Practice set #4 and solutions FIN-465 Derivatives (3 credits) Professor Michel Robe Practice set #4 and solutions To help students with the material, seven practice sets with solutions will be handed out. They will not be graded: the

More information

Resident Money Market and Investment Funds Return (MMIF) Worked examples - derivatives, securities borrowing/lending and overdrafts

Resident Money Market and Investment Funds Return (MMIF) Worked examples - derivatives, securities borrowing/lending and overdrafts Resident Money Market and Investment Funds Return (MMIF) Worked examples - derivatives, securities borrowing/lending and overdrafts Version 2 March 2014 Email: sbys@centralbank.ie Website: http://www.centralbank.ie/

More information

Forward Contracts and Forward Rates

Forward Contracts and Forward Rates Forward Contracts and Forward Rates Outline and Readings Outline Forward Contracts Forward Prices Forward Rates Information in Forward Rates Reading Veronesi, Chapters 5 and 7 Tuckman, Chapters 2 and 16

More information

J. Gaspar: Adapted from Jeff Madura International Financial Management

J. Gaspar: Adapted from Jeff Madura International Financial Management Chapter3 International Financial Markets J. Gaspar: Adapted from Jeff Madura International Financial Management 3-1 International Financial Markets Can be segmented as follows: 1.The Foreign Exchange Market

More information

Guidance on Implementing Financial Instruments: Recognition and Measurement

Guidance on Implementing Financial Instruments: Recognition and Measurement STATUTORY BOARD SB-FRS 39 FINANCIAL REPORTING STANDARD Guidance on Implementing Financial Instruments: Recognition and Measurement CONTENTS SECTION A SCOPE A.1 Practice of settling net: forward contract

More information

FIN 472 Fixed-Income Securities Forward Rates

FIN 472 Fixed-Income Securities Forward Rates FIN 472 Fixed-Income Securities Forward Rates Professor Robert B.H. Hauswald Kogod School of Business, AU Interest-Rate Forwards Review of yield curve analysis Forwards yet another use of yield curve forward

More information