STRAYER ITB400 QUIZ 7 ALL CORRECT ANSWER

Question 1

3 out of 3 points

Correct

Pricing a currency swap after inception involves

Question 2

3 out of 3 points

Correct

Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow £5,000,000 fixed for 1 year. The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as $2.00×(1.08)/£1.00×(1.06) = $2.0377/£1. Their external borrowing opportunities are:

A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. In order for X and Y to be interested, they can face no exchange rate risk

What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y?

Question 3

3 out of 3 points

Correct

Use the following information to calculate the quality spread differential (QSD):

Question 4

3 out of 3 points

Correct

The primary reasons for a counterparty to use a currency swap are

Question 5

3 out of 3 points

Correct

A major risk faced by a swap dealer is mismatch risk. This is

Question 6

0 out of 3 points

Incorrect

A major risk that can be eliminated through a swap is exchange rate risk.

Question 7

3 out of 3 points

Correct

Suppose the quote for a five-year swap with semiannual payments is 8.50—8.60 percent. This means

Question 8

3 out of 3 points

Correct

A major risk faced by a swap dealer is credit risk. This is

Question 9

3 out of 3 points

Correct

Floating for floating currency swaps

Question 10

0 out of 3 points

Incorrect

Consider the dollar- and euro-based borrowing opportunities of companies A and B.

A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as $2.00×(1.08)/€1.00×(1.06) = $2.0377/€1.

Is there a mutually beneficial swap?

Question 11

3 out of 3 points

Correct

A major risk faced by a swap dealer is exchange rate risk. This is

Question 12

3 out of 3 points

Correct

When a swap bank serves as a dealer:

Question 13

3 out of 3 points

Correct

Pricing an interest-only single currency swap after inception involves

.

Question 14

3 out of 3 points

Correct

Which combination of the following represent the risks that a swap dealer confronts?

(i)- interest rate risk

(ii)- basis risk

(iii)- exchange rate risk

(iv)- political risk

(v)- sovereign risk

Question 15

3 out of 3 points

Correct

Company X wants to borrow $10,000,000 floating for 5 years. Company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are:

Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for

A = Company X’s external borrowing rate

B = Company Y’s payment to X (rate)

C = Company X’s payment to Y (rate)

D = Company Y’s external borrowing rate

Question 16

3 out of 3 points

Correct

A fully diversified U.S. portfolio is about

Question 17

0 out of 3 points

Incorrect

With regard to the OIP,

Question 18

3 out of 3 points

Correct

The less correlated the securities in a portfolio,

Question 19

3 out of 3 points

Correct

Emerald Energy is an oil exploration and production company that trades on the London stock market. Assume that when purchased by an international investor the stock’s price and the exchange rate were £5 and £0.64/$1.00 respectively. At selling time, one year after the purchase date, they were £6 and £0.60/$1.00. Calculate the investor’s annual percentage rate of return in terms of the U.S. dollars.

Question 20

3 out of 3 points

Correct

The realized dollar returns for a U.S. resident investing in a foreign market will depend on the return in the foreign market as well as on the exchange rate fluctuations between the dollar and the foreign currency.

Calculate the variance of the monthly rate of return in dollar terms, if the variance of the foreign market’s return (in terms of its own currency) is 1.14, the variance between the U.S. dollar and the foreign currency is 17.64, the covariance is 2.34, and the contribution of the cross-product term is 0.04.

Question 21

0 out of 3 points

Incorrect

Assume that you have invested $100,000 in Japanese equities. When purchased the stock’s price and the exchange rate were ¥100 and ¥100/$1.00 respectively. At selling time, one year after purchase, they were ¥110 and ¥110/$1.00. The dollar rate of return would be:

Question 22

3 out of 3 points

Correct

Bema Gold is an exploration and production company that trades on the Toronto stock exchange. Assume that when purchased by an international investor the stock’s price and the exchange rate were CAD5 and CAD1.0/USD0.72 respectively. At selling time, one year after the purchase date, they were CAD6 and CAD1.0/USD1.0. Calculate the investor’s annual percentage rate of return in terms of the U.S. dollars if the investor had sold CAD5, the principal investment amount at the same time that the stock was purchased, forward at the forward exchange rate of CAD1/USD.80.

Question 23

0 out of 3 points

Incorrect

A 5%-annual coupon British has a par value of £1,000, matures in five years, and has a yield to maturity of 4%. The current exchange rate is $2.00 = £1.00 and inflation is forecast at 3% in the U.S. and 2% in the U.K. per year for the next five years. If a dollar-based investor used forward contracts to redenominate this bond into dollars, what would be his rate of return?

Question 24

0 out of 3 points

Incorrect

Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago. You had invested €10,000 to buy Microsoft shares for $120 per share; the exchange rate was $1.55 per euro. You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.50 per euro. Compute the rate of return on your investment in euro terms.

Question 25

3 out of 3 points

Correct

Assume that you have invested $100,000 in Japanese equities. When purchased the stock’s price and the exchange rate were ¥100 and ¥100/$1.00 respectively. At selling time, one year after purchase, they were ¥110 and ¥110/$1.00. If the investor had sold ¥10,000,000 forward at the forward exchange rate of ¥105/$1.00 the dollar rate of return would be:

Question 26

3 out of 3 points

Correct

Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago. You had invested €10,000 to buy Microsoft shares for $120 per share; the exchange rate was $1.55 per euro. You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.50 per euro. How much of the return is due to the exchange rate movement?

Question 27

0 out of 3 points

Incorrect

Hedge fund advisors typically receive a “2-plus-twenty” management fee

Question 28

0 out of 3 points

Incorrect

Current research suggests that

Question 29

0 out of 3 points

Incorrect

Bema Gold is an exploration and production company that trades on the Toronto stock exchange. Assume that when purchased by an international investor the stock’s price and the exchange rate were CAD5 and CAD1.0/USD0.72 respectively. At selling time, one year after the purchase date, they were CAD6 and CAD1.0/USD1.0. Calculate the investor’s annual percentage rate of return in terms of the U.S. dollars.

Question 30

3 out of 3 points

Correct

Assume that you have invested $100,000 in British equities. When purchased, the stock’s price and the exchange rate were £50 and £0.50/$1.00 respectively. At selling time, one year after purchase, they were £60 and £0.60/$1.00. If the investor had sold £50,000 forward at the forward exchange rate of £0.55/$1.00, the dollar rate of return would be: