Deck 9: Currency Futures and Swaps

Question 1

Futures contracts emerged:

A) to replace forward contracts as a hedging instrument
B) to replace forward contracts as a speculative instrument
C) out of the process of financial evolution, to surmount some problems associated with forward contracts
D) to satisfy some regulatory requirements

Answer 1

out of the process of financial evolution, to surmount some problems associated with forward contracts

Question 2

The Australian dollar futures contract was not traded on the Sydney Futures Exchange during the 1990s because:

A) of the lack of demand for the contract
B) it did not have the same specifications as the contract traded on the IMM
C) forward contracts are better hedging and speculative instruments
D) the Australian dollar is not a major currency

Answer 2

of the lack of demand for the contract

Question 3

Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662.
Which party is likely to default if the spot rate three months hence is 1.8000?

A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

Answer 3

counterparty A

Question 4

Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662.
Which party is likely to default if the spot rate three months hence is 1.7000?

A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

Question 5

Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662.
Which party is likely to default if the spot rate three months hence is 1.8000?

A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

Question 6

Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662.
Which party is likely to default if the spot rate three months hence is 1.7000?

A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

Question 7

Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662.
Which party is likely to default if the spot rate three months hence is 1.7662?

A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

Question 8

Suppose that two counterparties, A and B, enter a three-month forward contract on 1 January, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. On 1 March, A decides it no longer needs to sell USD1 million on 31 March, so it enters a one-month forward contract to buy USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C. Calculate the net cost to counterparty A, before transaction costs.

A) 0.0338
B) -AUD33 800
C) AUD33 800
D) AUD1.8 million

Question 9

Suppose that two counterparties, A and B, enter a three-month forward contract on 1 January, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662. On 1 March, A decides it no longer needs to buy USD1 million on 31 March, so it enters a one month forward contract to sell USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C. Calculate the net cost to counterparty A, before transaction costs.

A) 0.0338
B) -AUD33 800
C) AUD33 800
D) AUD1.8 million

Question 10

Which of the following is NOT a means whereby the default risk is controlled in futures trading?

A) the clearing corporation acting as the counterparty to all contracts
B) imposing daily limits on price movements
C) only low-risk participants are allowed to trade
D) implementing daily settlement and margin requirements

Question 11

In futures trading, a limit move occurs when:

A) the limit on the number of contracts a trader can hold at any point in time is changed
B) the price of the contract hits the specified limit
C) the limit on the price of the contract is changed
D) a limit is imposed on the number of daily transactions

Question 12

In currency futures trading, the settlement exchange rate is the:

A) closing exchange rate
B) opening exchange rate
C) exchange rate upon which marking-to-market is based
D) average of the high and low exchange rates

Question 13

Calculate the value of the contract at 4^th February and the credit or debit to the margin account on the 4 ^th February. Suppose that a trader buys one three-month Australian dollar forward contract on 1 February at 0.5662 (USD/AUD). On successive days the following may happen as the settlement exchange rate changes (in accordance with the spot rate)

A) 57,500 and -880
B) 57,500 and +880
C) 57,500 and +650
D) 57,500 and -650

Question 14

Marking-to-market risk of futures trading arises from:

A) the effect of unpredictable changes in the interest rate on the margin account
B) daily exchange rate volatility
C) variable transaction costs
D) all of the given answers

Question 15

A firm buys AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.4900.
How much will the firm gain or lose on the forward contract?

A) -AUD10 000
B) -USD10 000
C) AUD10 000
D) USD10 000

Question 16

A firm buys AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.5100.
How much will the firm gain or lose on the forward contract?

A) -AUD10 000
B) -USD10 000
C) AUD10 000
D) USD10 000

Question 17

A firm sells AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.4900.
How much will the firm gain or lose on the forward contract?

A) -AUD10 000
B) -USD10 000
C) AUD10 000
D) USD10 000

Question 18

A firm sells AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.5100.
How much will the firm gain or lose on the forward contract?

A) -AUD10 000
B) -USD10 000
C) AUD10 000
D) USD10 000

Question 19

Two important functions carried out by futures markets are:

A) both price discovery and settlement of future exchange rate transactions
B) both risk transfer and settlement of future exchange rate transactions
C) both price discovery and research
D) both price discovery and risk transfer

Question 20

Theoretically, arbitrage ensures that:

A) the offer forward rate is equal to the futures bid rate
B) the offer forward rate is equal to the futures offer rate
C) the futures offer rate is equal to the futures bid rate
D) the bid-offer spread in the forward and futures markets are equal

Question 21

The size of the Chicago Mercantile Exchange, and the Sydney Futures Exchange, Australian dollar contract is:

A) AUD100 000
B) USD100 000
C) AUD1 000
D) USD1 000

Question 22

An over-the-counter market is:

A) a market comprised of a network of buyers and sellers executing transactions by means of telecommunications
B) an organised market where buyers meet face-to-face
C) a market conducted over-the-counter at bank branches
D) a market conducted solely via the internet

Question 23

Futures contracts can circumvent the problematic features of forward contracts except the problem that they:

A) are not standardised
B) have a high risk of default
C) lack liquidity
D) have short maturities

Question 24

Futures markets are used primarily for:

A) trading
B) speculation
C) hedging
D) position taking

Question 25

The difference between a currency swap and a foreign exchange swap is that:

A) in the currency swap, only the principal amount is exchanged
B) in the currency swap, only interest payments are ever exchanged
C) in the foreign exchange swap, only the principal amount is exchanged, whereas in a currency swap, a principal amount is usually exchanged at the outset and repayments occur over time involving both principal and interest
D) in the foreign exchange swap, only interest payments are exchanged

Question 26

In a parallel loan, the interest payments and the repayment of principal are based on:

A) an exchange rate that is agreed upon in advance
B) the forward exchange rate
C) the expected spot exchange rate
D) the exchange rate prevailing when the payment is due

Question 27

In a currency swap, the interest payments and repayment of the principal are based on:

A) an exchange rate that is agreed upon in advance
B) the forward exchange rate
C) the expected spot exchange rate
D) the exchange rate prevailing when the payment is due

Question 28

The development of swaps was assisted by:

A) government regulations restricting access to some European capital markets
B) an interest rate swap arranged between the IFM and UNESCO
C) a currency swap between the World Bank and IBM
D) both an interest rate swap arranged between the IFM and UNESCO and a currency swap between the World Bank and IBM

Question 29

What does ISDA stand for?

A) International Securities Dealers Association
B) International Securities and Derivatives Association
C) International Swaps and Derivatives Association
D) Investor Security Development Association

Question 30

In a currency swap involving A receiving Australian dollar payments and B receiving euro payments, a rise in the actual exchange rate expressed as (EUR/AUD) implies:

A) appreciation of the euro and a loss incurred by B
B) depreciation of the euro and a loss incurred by A
C) appreciation of the Australian dollar and a loss incurred by B
D) depreciation of the Australian dollar and a loss incurred by A

Question 31

In a currency swap involving A receiving euro payments and B receiving Australian dollar payments, a rise in the actual exchange rate expressed as (EUR/AUD) implies:

A) appreciation of the euro and a loss incurred by B
B) depreciation of the euro and a loss incurred by A
C) appreciation of the Australian dollar and a loss incurred by B
D) depreciation of the Australian dollar and a loss incurred by A

Question 32

Consider a 3-year currency swap with a notional principal of AUD100,000, whereby A receives annual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD). The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year. Calculate the cash flows in year one.

A) B pays A USD2,000
B) A pays B USD2,000
C) B pays A AUD2,000
D) A pays B AUD2,000

Question 33

Consider a 3-year currency swap with a notional principal of AUD100,000, whereby A receives annual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD). The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year. Calculate the cash flows in year two.

A) B pays A USD2,000
B) A pays B USD2,000
C) no net payment is required
D) none of the given answers

Question 34

Consider a 3-year currency swap with a notional principal of AUD100,000, whereby A receives bannual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD). The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year. Calculate the cash flows in year three.

A) B pays A USD4,000
B) A pays B USD4,000
C) B pays A AUD4,000
D) A pays B AUD4,000

Question 35

Consider a 3-year interest rate swap with a notional principal of AUD100,000, whereby A receives annual payments based on a floating interest rate and B receives annual payments based on a fixed rate of 5%pa. The floating interest rates on each payment date assume the values 6%, 5% and 4%. Calculate the cash flows in year three.

A) B pays A USD1,000
B) A pays B USD1,000
C) B pays A AUD1,000
D) A pays B AUD1,000

Question 36

A basis swap involves:

A) two variable interest rates
B) two fixed interest rates
C) both two variable interest rates and two fixed interest rates
D) none of the given answers

Question 37

A cross currency interest rate swap involves:

A) two fixed interest rates on two currencies
B) two floating interest rates on two currencies
C) a fixed interest rate on one currency and a floating interest rate on another currency
D) two fixed or floating interest rates on two currencies, neither of which is the U.S. dollar

Question 38

Which statement is INCORRECT?

A) Pricing swap default risk is adding a premium on the fixed rate to compensate the receiver of the . fixed payments for the risk arising from the possibility that the other party may default.
B) In practice, counterparties may seek to mitigate risk rather than price it.
C) A common method of mitigating risk is to ration the amount of swaps with any one counterparty.
D) It is not possible to model the magnitude of potential default risk.

Question 39

A money market swap is:

A) a swap involving interest rates on two money market instruments
B) a swap involving the yields on money and bonds
C) a swap involving the yields on money and Treasury bills
D) a swap with a maturity of three years or less

Question 40

An option on a swap is a contract that gives the holder the right to:

A) engage in a specified swap
B) terminate the swap without paying a penalty
C) swap one option for another
D) buy out the swap