optiix

Which of the following statements regarding forward rate agreements (FRAs) is least accurate?

A) Because the cash payment will happen in the future, the forward interest rate reflects the creditworthiness of the party which is long the FRA.

B) If the floating rate at contract expiration is greater than the rate specified in the FRA, the long position will receive a payment.

C) If the floating rate at contract expiration is less than the rate specified in the FRA, the right to lend at rates higher than market rates has a positive value.

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A forward rate agreement can be viewed as a forward contract to borrow or lend money at a certain rate at some future date. Because no actual loan is made at the settlement date, the forward interest rate does not need to reflect the creditworthiness of the parties to the contract (however, the parties may still face default risk).
If the floating rate at contract expiration is above the rate specified in the forward agreement, the long position in the contract can be viewed as the right to borrow at below market rates and the long will receive a payment. If the reference rate at the expiration date is below the contract rate, the short can be viewed as the right to lend at rates higher than market rates.

optiix

The short in a forward rate agreement:

A) faces default risk.

B) profits if LIBOR decreases.

C) profits if London Interbank Offered Rate (LIBOR) increases.

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Each party to a forward contract faces default risk to some extent. If the floating rate at contract expiration (LIBOR or Euribor) is above the rate specified in the forward rate agreement (FRA), the long position in the contract can be viewed as the right to borrow at below market rates and the long will receive a payment from the short. If floating rates (LIBOR or Euribor) at the expiration date are below the rate specified in the FRA the short will receive a cash payment from the long. However, "the short profits if LIBOR decreases" is not necessarily true because LIBOR can decrease but remain above the rate specified in the FRA.

optiix

A forward rate agreement (FRA):

A) can be used to hedge the interest rate exposure of a floating-rate loan.

B) is settled by making a loan at the contract rate.

C) is risk-free when based on the Treasury bill rate.

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An FRA settles in cash and carries both default risk and interest rate risk, even when based on an essentially risk-free rate. It can be used to hedge the risk/uncertainty about a future payment on a floating rate loan.

optiix

An FRA is:

A) a Forward Rate Agreement.

B) the Futures Regulatory Administration.

C) a Forward Riskfree Asset.

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An FRA is a forward rate agreement.

optiix

A forward rate agreement (FRA):

A) can sometimes be viewed as the right to borrow money at below-market rates.

B) requires the long to pay cash to the short if the rate specified in the contract at expiration is below the current floating rate.

C) generally uses a fixed reference interest rate.

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If the floating rate is above the rate specified in the agreement, the long position can be viewed as the right to borrow at below-market rates. Floating rates like LIBOR are used in FRAs. The long must pay the short only if the contracted rate at the expiration date is above the floating rate.

optiix

Which of the following statements regarding Eurodollar time deposits is NOT correct?

A) Sometimes the best rates are available in New York City.

B) Rates are quoted as an add-on yield.

C) They are available in Switzerland.

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Eurodollar time deposits are U.S. dollar denominated deposits outside the United States. Rates are quoted as an annualized add-on yield, based on a 360-day year.

optiix

Eurodollar time deposits are:

A) denominated in U.S. dollars (USD).

B) priced at a discount.

C) actively traded in the secondary market.

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Eurodollar time deposits are USD denominated deposits with large banks outside the U.S. They are usually short term and not traded in a secondary market.

optiix

Which of the following statements regarding Eurodollar time deposits is NOT correct?

A) USD denominated deposits in large banks in Tokyo are Eurodollar accounts.

B) Euro denominated deposits at large banks in the U.S. are Eurodollar accounts.

C) U.S. dollar (USD) denominated deposits at large banks in London are Eurodollar accounts.

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Eurodollar deposits are USD denominated deposits in large banks held outside the United States. By convention, the rates are quoted as an add-on yield. Following this convention, euro-denominated deposits held outside of the euro-block countries would be “Euroeuro” deposits.

optiix

The offer rate on U.S. dollar (USD) denominated loans between large banks in London is called:

A) London Interbank Offered Rate (LIBOR).

B) Eurobor.

C) the Exchequer rate.

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The rate on USD denominated loans between large banks in London is the LIBOR.

optiix

If 60-day London Interbank Offered Rate (LIBOR) is 6 percent, the interest on a 60-day LIBOR-based Eurodollar deposit of $990,000 is:

A) $10,000.

B) $9,900.

C) $59,400.

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0.06 × (60/360) × 990,000 = $9,900.