Reading 71: Swap Markets and Contracts- LOSb(part 1)～ Q1

statements, following, currency, examples, exchange

LOS b, (Part 1): Define and give examples of currency swaps.

Q1. Which of the following statements about a currency swap is TRUE?

A) Payments are netted at each settlement date.

B) Changes in exchange rates do not affect the swap payments.

C) If one party pays a fixed rate of interest, the other party must pay a floating rate.

Q2. Which of the following statements regarding a fixed-for-fixed currency swap of euros for British pounds is least accurate?

A) One party makes certain payments in Euros.

B) The notional principal amounts, adjusted for exchange rate changes, are exchanged at the termination of the swap.

C) The periodic payments are not netted, both payments are always made.

Q3. An investor enters into a swap that requires the notional principal amounts be exchanged at the beginning and at the end of the swap contract. This is most likely a:

A) plain-vanilla swap.

B) fixed-for-fixed swap.

C) currency swap.

Q4. Consider a U.S. commercial bank that wishes to make a two-year, fixed-rate loan in Australia denominated in Australian dollars. The U.S. bank will fund the loan by issuing two-year CDs in the U.S. Why would the U.S. bank wish to enter into a currency swap? The bank faces the risk that:

A) the Australian dollar increases in value against the U.S. dollar.

B) interest rates in Australia decline.

C) the Australian dollar decreases in value against the U.S. dollar.

Q5. Consider a U.S. commercial bank that takes in one-year certificates of deposit (CDs) in its Hong Kong branch, denominated in Hong Kong dollars, to fund three-year, fixed-rate loans the bank is making in the U.S. denominated in U.S. dollars. Why would this bank wish to enter into a currency swap? The bank faces the risk that the Hong Kong dollar:

A) decreases in value against the U.S. dollar and the risk that interest rates increase in Hong Kong.

B) increases in value against the U.S. dollar and the risk that interest rates increase in Hong Kong.

C) decreases in value against the U.S. dollar and the risk that interest rates decrease in Hong Kong.