of the following is NOT true in swap market participation by the commercial bank? a. Commercial bank engaged in swaps to reduce interest rate risk. b. Serve as an intermediary by matching up to two parties in a swap. c. Serve as an investment bank by taking the counterparty position to accommodate a party that desires to engage in a swap.

of the following is NOT true in swap market participation by the commercial bank? a. Commercial bank engaged in swaps to reduce interest rate risk. b. Serve as an intermediary by matching up to two parties in a swap. c. Serve as an investment bank by taking the counterparty position to accommodate a party that desires to engage in a swap.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter18: Long-term Debt Financing

Section: Chapter Questions

Problem 1ST

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If a bank acts as a market maker between two counterparties in swaps transactions (earning a spread), is it subject to credit risk when it has two offsetting swaps contracts? Explain.
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)?
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
What is a mismatch risk (for an IRS)? a. The major risk faced by a swap dealer-the risk that a counter party will default on its end of the swaps. b. The risk that a country will impose exchange rate restrictions that will interfere with performance on the swaps c. Interest rates might move against the swap bank after it has only gotten half of a swap on the books, or if it has an unhedged position d. The risk that it will be difficult to find counterpart that wants to borrow the right amount of money for the right amount of time
Discuss the similarities and differences between a bond repurchase agreement anda sale and buyback transaction. How do repos done by securities dealers differ from those done by central banks?
Merck is an example of a company who decided to mitigate the adverse impact of market fluctuations by entering into hedging agreements using: B. Interest rate swaps C. Both A & B A. Currency options D. Neither A or B
Which of the following is not a prudent practice in hedging against transactional exposures? A. Use only options to capture the potential upside surprises. B. Hedge against all receivables and payables in all markets the company operates. C. Only hedge if the currency is a major currency. D. none of the above.
Which of the following refers to the money market hedge of a company’s payables (receivables)? 1. A company sells (buys) its foreign currency receivables (payables) forward to eliminate its exchange risk exposure. 2. A company borrows (or lends) in foreign currency to hedge its foreign currency receivables (payables), thereby matching its assets and liabilities in the same currency. 3. A company buys a currency at the place where it is priced cheaper and immediately sells it at the place where it is priced higher. 4. A company buys a foreign currency call (put) option to hedge its foreign currency payables (receivables).
i)discuss accounting issues in risk management, and explain the following terms: fair value hedge, cash flow hedge, foreign investment hedge, speculation ii)discuss some of the famous cases in which the lack of proper risk management policies and procedures have caused companies to incur large losses. iii)explain some general guidelines that senior management should follow to set up and maintain an effective risk management system. iv)explain how a currency swap can be used to hedge a stream of foreign cash flows. v)define interest rate derivatives, and compare and contrast them against bond derivatives.
While visiting one of my friends at a local bank, I overheard a high ranking bank executive tell one of his colleagues that “a plain vanilla interest rate swap is a contract where two counterparties exchange cash flows based on the differences in the variation of two floating-rate indices where the payments are computed on an amortizing notional principal amount and can be used to hedge the interest rate risk for an institution with more rate sensitive assets than rate sensitive liabilities.” Comment on this statement and explain why it is right or wrong (while certain aspects of this question is similar to questions 8 and 9, it is trying to get at whether you understand interest rate swaps and what they are designed to do).
A swap: Group of answer choices B. Gives the holder the right to see the underlying bond. A. Allows the buyer to purchase the underlying instrument. C. Is an OTC agreement to exchange the cash flows of two different securities. D. Not effective at managing interest rate risks.
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