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Midterm

Mid Term with answers 3504 W13.docx

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Department
Business
Course
BUSI 4504
Professor
All Professors
Semester
Winter

Description
Eric Sprott School of BusinessInternational Finance BUSI 3504Michael L McIntyreMID TERM TEST Winter 2013 Duration 90 minutesPlease select the best or most appropriate answer from among those provided 1When one refers to the foreign exchange rate applicable on the return trip or on the round trip this refers toaThe FX rate you get at the airport when you convert foreign currency back to local currency after a vacationbThe FX rate applicable on conversion after liquidating a long position in one currency in order to repay a short position in a second currency to conclude a cross currency investment strategycThe FX rate applicable on conversion of proceeds of a short position in one currency in order to take a long position in a second currency to initiate a cross currency investment strategydThe term is s meaningless and does not have general application in discussions of foreign currencyeNone of the above b half marks for a and c2A fixed to floating interest rate swap quote that is 994997 means thataThe swap dealer pays fixed to the fixed rate borrower at 994 and receives LIBOR flat from the fixed rate borrowerbThe swap dealer pays fixed to the fixed rate borrower at 997 and receives LIBOR flat from the fixed rate borrowercThe swap dealer receives fixed from the floating rate borrower at 994 and pays LIBOR flat to the floating rate borrowerdThe swap dealer receives fixed from the fixed rate borrower at 997 and pays fixed to the floating rate borrower at 994eNone of the abovea 3Thinking of the matter of credit risk in a fixed to floating interest rate swap transaction between a swap dealer and a swap counterparty and where the swap dealer is not a direct lender to the swap counterpartyaThe swap dealer has credit risk in the swap transactionbThe swap counterparty has credit risk in the swap transactioncBoth the swap dealer and the swap counterparty have credit risk in the swap transactiondNeither the swap dealer nor the swap counterparty have credit risk in the swap transactioneNone of the abovec half marks for a and b4In a US dollar fixed to floating interest rate swap the floating side is based onaThe prevailing Bankers Acceptance ratePage 1 of 13b The prevailing LIBOR rate plus the swap counterpartys credit risk premiumcThe prevailing LIBOR rate plus the swap dealers credit risk premiumdLIBOR flateNone of the aboved5In financial markets the level of the spot FX rate and the level of both the foreign and domestic interest rates fluctuates all the time with a component of randomness Despite this the correctly priced forward exchange rate can be determined today with certainty This is becauseaFX rates arent really randombWhile a forward exchange rate can be determined today it is not actually known with certaintyit is really just an estimatecTraders can enter a trading strategy today that replicates the forward exchange contract in which all elements of the trading strategy are known today with certaintydNone of the abovec6Intermediate payments are made under futures contracts becauseaThis facilitates public trading of the contract on an exchangebInvestors prefer to receive intermediate payments as profits under the contract arisecThis eliminates counterparty risk in the contractdNone of the abovea7Currency futures contracts cover a prespecified number of units of currencythe contract sizebecauseaThis is not trueeach futures contract corresponds to a single unit of the applicable currencybTypically economic agents prefer to enter hedges in round quantities of a currencycThe idea is to make the contract sizes small enough so that hedgers can use them to match the total amount they want to hedge while making contract sizes large enough to keep the number of traded contracts manageabledNone of the abovec8Bankers Acceptances differ from LIBOR notes in thataBankers Acceptances are sold with a declared interest rate to be applied to principal and paid at maturity whereas LIBOR notes are sold at a discountbBankers Acceptances are sold at a discount whereas LIBOR notes are sold with a declared interest rate to be applied to principal and paid at maturitycThey dont differboth are sold at a discountdThey dont differboth are sold with a declared interest rate to be applied to principal and paid at maturityeNone of the abovePage 2 of 13
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