返回列表 发帖

Derivatives【Reading 61】Sample

Which of the following statements about forward contracts is least accurate?
A)
A forward contract can be exercised at any time.
B)
The long promises to purchase the asset.
C)
Both parties to a forward contract have potential default risk.



Forward contracts typically require a purchase/sale of the asset on the expiration/delivery date specified in the contract. The other statements are true.

Macklin Metals has received 80 million pounds sterling. The company plans to spend $120 million on a project in the United States in 90 days. Macklin inters into a cash settlement currency forward to exchange the pounds for U.S. dollars at a rate of $1.50 per pound in 90 days. If the exchange rate is $1.61 per pound at the settlement date, the cash settlement Macklin will pay or receive is closest to:
A)
$8.8 million payment.
B)
$8.8 million receipt.
C)
$5.5 million payment.



Under the contract, Macklin receives:
80 million pounds × $1.50 = $120.0 million
At market rates, Macklin would receive:
80 million pounds × $1.61 = $128.8 million
Macklin must pay the difference, $8.8 million ($128.8 million − $120 million), as the cash settlement to the counterparty.

TOP

Which of the following statements regarding currency forward contracts is least accurate?
A)
A long position in a currency that appreciates more than expected over the term of the contract will have a positive value at contract expiration.
B)
If the domestic currency appreciates over the term of the contract, the party that is long the foreign currency will have losses on the contract.
C)
Currency forward contracts can be settled in cash or by delivery.



The forward exchange rate in the contract will reflect the expected appreciation or depreciation of the currency. If a currency appreciates by more than the expected appreciation implicit in the forward exchange rate, the party that is long that currency will have gains. An appreciation of one currency does not equate to gains to the party that is long that currency; if it appreciates by less than the appreciation reflected in the forward exchange rate, the long will have losses.

TOP

An agreement that requires the parties to exchange a certain amount of Yen for a certain amount of Euros on a specific date in the future is called a(n):
A)
exchange rate agreement.
B)
currency forward contract.
C)
foreign exchange future.



Such an agreement is called a currency forward contract.

TOP

A currency forward contract:
A)
requires a payment at settlement based on London Interbank Offered Rate.
B)
can be a deliverable contract.
C)
is priced using the future interest rate on a foreign currency.



A currency forward contract can be a deliverable or cash-settlement contract. It is a contract to exchange fixed amounts of two currencies at settlement and its value depends on market exchange rates at contract expiration.

TOP

When calculating the settlement payment on a long position in a London Interbank Offered Rate (LIBOR)-based forward rate agreement, the denominator is best described as:
A)
a discount factor based on the contract LIBOR rate.
B)
the interest differential between a loan made at the contract rate and one made at the market rate at contract expiration.
C)
a discount factor based on LIBOR at settlement.



Since the interest differential between a loan made at the contract rate and one made at the market rate would be realized at the end of a loan period beginning at the settlement date, it must be discounted to get the value at the settlement date. The correct rate for this discounting is the actual rate (market rate) at the settlement date. The interest differential is the numerator of the formula for calculating the settlement value.

TOP

When calculating the settlement payment on a long position in a London Interbank Offered Rate (LIBOR)-based forward rate agreement, the denominator is best described as:
A)
a discount factor based on the contract LIBOR rate.
B)
the interest differential between a loan made at the contract rate and one made at the market rate at contract expiration.
C)
a discount factor based on LIBOR at settlement.



Since the interest differential between a loan made at the contract rate and one made at the market rate would be realized at the end of a loan period beginning at the settlement date, it must be discounted to get the value at the settlement date. The correct rate for this discounting is the actual rate (market rate) at the settlement date. The interest differential is the numerator of the formula for calculating the settlement value.

TOP

Consider a $1 million 90-day forward rate agreement based on 60-day London Interbank Offered Rate (LIBOR) with a contract rate of 5%. If, at contract expiration, 60-day LIBOR is 6%, the short must pay:
A)
$1,652.89.
B)
$1,650.17.
C)
$1,666.67.



[(0.06 − 0.05)(60 / 360)(1,000,000)] / [1 + 0.06(60 / 360)] = 1,650.17.

TOP

A 60-day $10 million forward rate agreement (FRA) on 90-day London Interbank Offered Rate (LIBOR) (a 2X5 FRA) is priced at 4%. If 90-day LIBOR at the expiration date is 4.1%, the long:
A)
receives $2,474.63.
B)
receives $2,500.00.
C)
pays $2,474.63.



[(0.041 − 0.040)(90/360)(10,000,000)] / [1 + 0.041(90/360)] = $2,474.63.

TOP

The following data applies to a forward rate agreement that settles in 60 days:
  • It is based on 180-day LIBOR
  • The notional principal amount is $15 million
  • It calls for a forward rate of 6.5%
  • In 30 days, 180-day LIBOR will be 6.2%
  • In 60 days, 180-day LIBOR will be 7.0%
  • In 180 days, 180-day LIBOR will be 7.5%

The short’s cash payment at settlement is closest to:
A)
$37,500.
B)
the short will not have to make a payment.
C)
$36,232.



Settlement payment from short = notional principal × ((forward LIBOR at settlement − agreed forward rate) × (180/360)) / (1 + (floating × 180/360))
Payment = $15 million × ((7.0% − 6.5%) × (180/360)) / (1 + (0.07 × 180/360))
Payment = $36,231.88

TOP

返回列表