AFM Treasury and advanced risk management

Spot is $1.10 per euro. US interest is 5 percent and euro interest is 3 percent. By interest rate parity, the one year forward rate is closest to:

• 1 $1.080 per euro
• 2 $1.121 per euro
• 3 $1.155 per euro
• 4 $1.100 per euro

A company with floating rate borrowing wishes to convert to fixed payments. It should enter an interest rate swap to:

• 1 Pay fixed and receive floating
• 2 Pay floating and receive fixed
• 3 Buy a put option
• 4 Sell a futures contract

A company will borrow $10m in six months for six months. It uses three month futures contracts of $1m. The number of contracts is:

• 1 5
• 2 20
• 3 10
• 4 60

Using a forward contract to hedge a currency receipt:

• 1 Fixes the rate and removes both the downside and the upside
• 2 Gives the right but not the obligation to exchange
• 3 Gives upside if rates move favourably
• 4 Has an up-front premium

An increase in the volatility of the underlying asset, other things equal, will:

• 1 Increase the value of both call and put options
• 2 Decrease the value of a call option
• 3 Decrease the value of a put option
• 4 Have no effect on option values

Basis risk in hedging with futures is the risk that:

• 1 The counterparty defaults
• 2 The futures price and the spot price do not move together exactly
• 3 The contract is too small
• 4 Margin payments are not made

A company expects to receive $2m in three months. It is concerned the dollar will fall against its home currency. Which hedge could use money market borrowing?

• 1 Buy a call on the home currency
• 2 Borrow dollars now, convert them to the home currency and repay with the receipt
• 3 Buy dollars forward
• 4 Sell home currency forward