International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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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).
Why if your income is in local currency and you issue a bond in dollars, this might be a risky decision? Explain
Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?
A.
sell a currency call option in British pounds.
B.
borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
C.
sell pounds forward.
D.
purchase a currency put option in British pounds.
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- What is a eurodollar? If a French citizen deposits $10,000 in Chase Manhattan Bank in NewYork have eurodollars been created? What if the deposit is made in Barclay’s Bank in London?In Chase Manhattan’s Paris branch? Does the existence of the eurodollar market make theFederal Reserve’s job of controlling U.S. interest rates easier or more difficult? Explain.arrow_forwardWhat 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?arrow_forwardHow might thetreasurer of a multinational firm use the interest rate parity concept (a) when deciding howto invest the firm’s surplus cash and (b) whendeciding where to borrow funds on a short-termbasis?arrow_forward
- Jack Smith is concerned that the pound may depreciate substantially over the next month, but he also believes that the pound could appreciate substantially if specific situations occur. Should Jack use currency futures or currency options to hedge the exchange rate risk? Is there any disadvantage of selecting this method for hedging?arrow_forwardWhich one of the following is the rate that most international banks charge when they loan Eurodollars to other banks? Multiple Choice ADR LIBOR Cross-rate Gilt rate Swap ratearrow_forwardWhat 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 timearrow_forward
- Logan is conducting an economic evaluation under inflation using the then-current approach. If the inflation rate is j and the real time value of money rate is d, which of the following is the interest rate he should use for discounting the cash flows? a. j b. d c. j + d d. j + d + dj.arrow_forwardIf the euro depreciates against the U.S. dollar, can a dollar buy more or fewer euros as aresult? Explain.arrow_forwardWhich of the following reflects a hedge of net payables in British pounds by a U.S. firm? Group of answer choices a) purchase a currency call option in British pounds. b) sell pounds forward. c) borrower in US dollars, convert them to pounds, and invest them in a Britain. A and Carrow_forward
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