International Business Chapter 8

A major risk faced by a swap dealer is exchange rate risk. This is   a)the probability exchange rates will move against the dealer.   b)the probability that a foreign counterparty will default in a currency swap.   c)none of the options   d)the probability that either counterparty defaults in a currency swap.

How can exchange-rate risk be hedged using forward, futures, and options contracts? OA. Firms can buy a put option to hedge against a rise in the exchange rate. OB. Firms can buy a call option to hedge against a rise in the exchange rate. OC. Firms can sell forward contracts to hedge against a rise in the exchange rate. OD. All of the above.

Financial derivatives Select one: A. are only used by foreign currency traders to speculate on currency fluctuations. B. are generally legal contracts or exchange traded securities that are designed to transfer risk for a price. C. generally involve three parties. D. Both B and C are true.

How can the company use currency futures contracts to hedge against exchange rate risk?

1. At any given time, the bank will purchase foreign exchange currency at what cost?  a. market price b. client's selling price c. lower than the selling price 2. A bond call price amount is  a. lower than par value b. higher than par value c. lower than discount value

Answer true or false to the following statement and explain: “Investors engage in forward exchange transactions to hedge against foreign currency risk.”

8   When considering counterparty credit risk, which of the following financial products has the largest outstanding notional amount in the marketplace A. Credit default swaps. B. Foreign exchange forwards. C. Interest rate swaps. D. Repos and reverse repos

Hedgers should buy calls if they are hedging an expected outflow of foreign currency.   True or False ? Explain.

A foreign currency loan is a typical example for   O a. Currency Risk   O b. Interest rate risk   O c. Translation Exposure   O d. Transaction Exposure

“Investors engage in forward exchange transactions to hedge against foreign currency risk. EXPLAIN WHETHER TRUE OR FALSE

A firm gives all its employees American-style call options on the firm's stock. The options have a five- year life. The employees are not allowed to sell their options, but they can take long and short positions in the company's shares. As a result, if an employee does exercise his/her options, then he/she can sell the shares that they acquire. Which of the following statements is correct? O Highly risk-averse investors are better off exercising a fraction of their options early and holding a portfolio containing the remaining options and the shares obtained by exercising. O If the firm will not pay any dividends during the next five years, then an employee considering exercising prior to maturity will always be better off by undertaking trades in the firm's stock and borrowing or lending. O Options are more volatile than the underlying stock. Thus, if the options are in-the-money, employees with high risk aversion will be better off exercising their options, O If an employee believes…

Firms typically hedge their foreign exchange exposure to: A. Speculate on currency movements. B. Eliminate all currency risk. C. Reduce the uncertainty of future cash flows. D. Maximize short-term profits.

All of the following are internal hedging techniques for foreign exchange exposure, except: *       A. creating a natural hedge.       B. using leads and lags in FX transactions.       C. invoicing in the home currency.       D. using a swap

What kind of interest rate swap would a commercial bank with a negative re - pricing gap (that is, rate sensitive assets is less than rate sensitive liabilities) utilize to hedge rate risk exposure (that is, would the commercial bank enter into an interest rate swap to make floating rate payments and receive fixed rate payments)? Explain

12. The holding of foreign currency in the hope of a future sale is called a/an: A. arbitrage position B. long position C. short position D. selling position

What types of risks are interest rate andexchange rate swaps designed to mitigate?Why might one company prefer fixed-rate payments while another company prefers floating-ratepayments, or payments in one currency versusanother?

Question 6 Interest rate swap Why might an individual or organisation be willing to swap fixed-rate loans for floating-rate loans?  A. They may perceive that interest rates are ready to increase. B. Their cash flows may vary directly with interest rates. C. Floating rates are not lower than fixed rates. D. They may be able to postpone the payment of principal.

What kind of interest rate swap would a commercial bank with a negative re-pricing gap (that is, rate sensitive assets is less than rate sensitive liabilities) utilize to hedge interest rate risk exposure (that is, would the commercial bank enter into an interest rate swap to make floating rate payments and receive fixed rate payments)?