Question 1:
Make a distinction fully between an Interest Rate Swap and a Currency Swap. Why do swaps exist?
Question2:
Assume Firm X is able to obtain a $ bank loan with a term to maturity of six (6) years against LIBOR + 0.25%. It can as well issue fixed rate $ bonds with a term to maturity of six years against nine per cent p.a. Firm Y with a lower credit rating can attract a similar $ bank loan against LIBOR + 0.75 per cent and issue $ bonds against 10.25 % p.a. Suppose X insists on a net gain of 40 basis points (0.4 %), would a swap be possible between X and Y? Explain the flows clearly if any.
Question 3:
Derive and illustrate out:
i) The International Fisher Effect
ii) The Interest Rate Parity Theorem
iii) The Unbiased Forward Rate Theory
iv) The Fisher effect
Question 4:
Outline and illustrate the main differentiations between forward and futures contracts.
Question 5:
What do you understand by foreign exchange exposure? What are the potential methods a firm might use to hedge foreign exchange rate risk?