In a fixed-for-fixed currency swap where country A’s interest rate is higher than country B’s interest rate, who is the lender in the implicit loan: the counterparty paying in country A’s currency or the counterparty paying in country B’s currency? Justify your answer.
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- A foreign currency loan is a typical example for O a. Currency Risk O b. Interest rate risk O c. Translation Exposure O d. Transaction ExposureLet i be home interest rates, i* a foreign interest rates and p be the forward foreign exchange premium (=F/S-1). Assume there is a transaction cost equal to C incurred in any covered interest rate arbitrage. Write down the relation by which incentives are present for money to move from the foreign country to home.7. How can we obtain a pay-domestic-floating, receive-foreign-fixed currency swap by using a pay-domestic-fixed, receive-foreign-fixed currency swap and an appropriate interest rate swap?
- Which of the following statement is NOT true regarding the spot rate and forward rate? a. Forward rate can be calculated using the spot rate, the interest rate for domestic investment, and the foreign investment interest rate. b. Forward rate should be higher than the spot rate at the beginning of a forward contract. c. Forward rate is the rate of exchange at a future point in time. d. Spot rate is the current rate of exchange.Assume that interest rate parity holds. When a currency trades at a forward premium,what does that imply about domestic rates relative to foreign interest rates? When acurrency trades at a forward discount?Explain the foreign currency swaps and why are they undertaken? Explain the functional currency and what is a presentation currency.
- How is the London Interbank Offer Rate (LIBOR) used in the Eurocredit market when a loan is extended to a non-bank borrower?What does the term "carry trade" mean? Group of answer choices Borrow in the domestic currency to earn only the higher yield of the dollar implied by the failure of uncovered interest rate parity (UIRP). Borrow in foreign currency to earn only the expected capital appreciation of the dollar implied by the failure of UIRP. Borrow in the domestic currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the failure of UIRP. Borrow in the foreign currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the failure of UIRP.Answer the below questions. (a) For a single-name credit default swap, what is the difference between physical settlement and cash settlement? . (b) In physical settlement, why is there a cheapest-to-deliver issue?
- why a organisation should consider hedging net payables or net receivables with currency options rather than: forward contracts, and future contracts.Describe how foreign exchange transactions using futures would differ from those using forward exchange contracts. Hint: the bank always makes a profit on forex, by taking more of one currency in the exchange transaction and giving less of the other currency to the customer.