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Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. Which party is likely to default if the spot rate three months hence is 1.7000?


A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

E) All of the above
F) A) and D)

Correct Answer

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Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662. Which party is likely to default if the spot rate three months hence is 1.8000?


A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

E) A) and D)
F) A) and C)

Correct Answer

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A firm buys AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.4900. How much will the firm gain or lose on the forward contract?


A) -AUD10 000
B) -USD10 000
C) AUD10 000
D) USD10 000

E) None of the above
F) A) and D)

Correct Answer

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Consider a 3-year currency swap with a notional principal of AUD100,000, whereby A receives annual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD) . The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year. Calculate the cash flows in year two.


A) B pays A USD2,000
B) A pays B USD2,000
C) no net payment is required
D) none of the given answers

E) None of the above
F) A) and D)

Correct Answer

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Two important functions carried out by futures markets are:


A) both price discovery and settlement of future exchange rate transactions
B) both risk transfer and settlement of future exchange rate transactions
C) both price discovery and research
D) both price discovery and risk transfer

E) B) and D)
F) All of the above

Correct Answer

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Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. Which party is likely to default if the spot rate three months hence is 1.7662?


A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

E) B) and C)
F) A) and C)

Correct Answer

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Futures contracts emerged:


A) to replace forward contracts as a hedging instrument
B) to replace forward contracts as a speculative instrument
C) out of the process of financial evolution, to surmount some problems associated with forward contracts
D) to satisfy some regulatory requirements

E) None of the above
F) A) and D)

Correct Answer

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In currency futures trading, the settlement exchange rate is the:


A) closing exchange rate
B) opening exchange rate
C) exchange rate upon which marking-to-market is based
D) average of the high and low exchange rates

E) B) and C)
F) C) and D)

Correct Answer

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Which statement is INCORRECT?


A) Pricing swap default risk is adding a premium on the fixed rate to compensate the receiver of the . fixed payments for the risk arising from the possibility that the other party may default.
B) In practice, counterparties may seek to mitigate risk rather than price it.
C) A common method of mitigating risk is to ration the amount of swaps with any one counterparty.
D) It is not possible to model the magnitude of potential default risk.

E) None of the above
F) All of the above

Correct Answer

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Consider a 3-year currency swap with a notional principal of AUD100,000, whereby A receives bannual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD) . The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year. Calculate the cash flows in year three.


A) B pays A USD4,000
B) A pays B USD4,000
C) B pays A AUD4,000
D) A pays B AUD4,000

E) A) and B)
F) A) and C)

Correct Answer

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A firm sells AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.4900. How much will the firm gain or lose on the forward contract?


A) -AUD10 000
B) -USD10 000
C) AUD10 000
D) USD10 000

E) None of the above
F) B) and C)

Correct Answer

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The size of the Chicago Mercantile Exchange, and the Sydney Futures Exchange, Australian dollar contract is:


A) AUD100 000
B) USD100 000
C) AUD1 000
D) USD1 000

E) None of the above
F) A) and B)

Correct Answer

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In futures trading, a limit move occurs when:


A) the limit on the number of contracts a trader can hold at any point in time is changed
B) the price of the contract hits the specified limit
C) the limit on the price of the contract is changed
D) a limit is imposed on the number of daily transactions

E) A) and C)
F) A) and B)

Correct Answer

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Marking-to-market risk of futures trading arises from:


A) the effect of unpredictable changes in the interest rate on the margin account
B) daily exchange rate volatility
C) variable transaction costs
D) all of the given answers

E) All of the above
F) None of the above

Correct Answer

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Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. Which party is likely to default if the spot rate three months hence is 1.7000?


A) counterparty A
B) counterparty B
C) both counterparty A and counterparty B
D) neither counterparty

E) C) and D)
F) A) and B)

Correct Answer

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A firm buys AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.5100. How much will the firm gain or lose on the forward contract?


A) -AUD10 000
B) -USD10 000
C) AUD10 000
D) USD10 000

E) All of the above
F) B) and C)

Correct Answer

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What does ISDA stand for?


A) International Securities Dealers Association
B) International Securities and Derivatives Association
C) International Swaps and Derivatives Association
D) Investor Security Development Association

E) A) and D)
F) All of the above

Correct Answer

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An over-the-counter market is:


A) a market comprised of a network of buyers and sellers executing transactions by means of telecommunications
B) an organised market where buyers meet face-to-face
C) a market conducted over-the-counter at bank branches
D) a market conducted solely via the internet

E) A) and D)
F) All of the above

Correct Answer

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Which of the following is NOT a means whereby the default risk is controlled in futures trading?


A) the clearing corporation acting as the counterparty to all contracts
B) imposing daily limits on price movements
C) only low-risk participants are allowed to trade
D) implementing daily settlement and margin requirements

E) B) and C)
F) A) and D)

Correct Answer

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In a currency swap involving A receiving euro payments and B receiving Australian dollar payments, a rise in the actual exchange rate expressed as (EUR/AUD) implies:


A) appreciation of the euro and a loss incurred by B
B) depreciation of the euro and a loss incurred by A
C) appreciation of the Australian dollar and a loss incurred by B
D) depreciation of the Australian dollar and a loss incurred by A

E) None of the above
F) B) and C)

Correct Answer

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