Deck 2: Foreign Exchange and Hedging Exposures

Question 1

Zero coupon swap is an arrangement

A)Involving exchange of zero coupon bonds.
B)Whereby only one party makes payment periodically.
C)Whereby one of the counter-parties makes payment in lump sum instead of periodically.
D)None of the above.

Answer 1

Whereby one of the counter-parties makes payment in lump sum instead of periodically.

Question 2

The acronym CIRCUS stands for

A)Current Interest Rate Swap.
B)Circular Currency Swap.
C)Combined Income Range Currency Swap.
D)Combined Interest Rate and Currency Swap.

Answer 2

Combined Interest Rate and Currency Swap.

Question 3

A forward rate agreement helps the user to

A)Fix the cost of borrowing.
B)Reduce the cost of borrowing.
C)Cover exchange risk
D)Avail tax benefit

Answer 3

Fix the cost of borrowing.

Question 4

The swap arrangement where principal amounts are not exchanged, but periodical payments will be a

A)Currency swap
B)Cross currency interest swap
C)Interest rate swap.
D)Non-Financial swap.

Question 5

An interest rate cap is a series of

A)Call options
B)Put options.
C)Periodical payments
D)Differential payments.

Question 6

FRAs can't+ be used for

A)Hedging.
B)Arbitraging.
C)Speculating.
D)Any of the Above.

Question 7

The true cost of hedging transaction exposure by using forward market is

A)Difference between agreed rate and spot rate at the time of entering into contract.
B)Difference between agreed rate and spot rate on the due date of contract
C)Forward premium / discount annualiz

Question 8

Hedging with options is best recommended for

A)Hedging receivables.
B)Hedging payables.
C)Hedging contingency exposures.
D)Hedging foreign currency loans

Question 9

A firm operating in India cannot hedge its foreign currency exposure through

A)Forwards.
B)Futures.
C)Options.
D)None of the above.

Question 10

Foreign currency exposures can be avoided by

A)Entering into forward contracts.
B)Denominating the transaction in domestic currency.
C)Exposure netting
D)Maintaining foreign currency accounts.

Question 11

The following method does not result in sharing of an exchange risk between importer and exporter

A)Denominating in a third currency.
B)Denominating partly in importer's currency and partly in exporter's currency.
C)Entering a exchange rate clause in the contract.
D)Denominating in domestic currency.

Question 12

Leading refers to

A)Advancing of receivables.
B)Advancing of payables.
C)Advancing payments either receivables or payables.
D)Advancing of receivables and delaying of payables.

Question 13

Translation exposure arises in respect of items translated at

A)Current rate.
B)Historical rate.
C)Average rate.
D)All of the above.

Question 14

Translation loss is

A)A loss to the parent company.
B)A loss to the subsidiary company.
C)A notional loss.
D)An actual loss.

Question 15

The translation exposure is positive when

A)Exposed assets are lesser than exposed liabilities.
B)Exposed liabilities are lesser than exposed assets.
C)The exposure results in profit.
D)There are no liabilities.

Question 16

For the purpose of translations, current rate refers to

A)The rate current at the time of transaction.
B)The rate prevailing on the date of the balance sheet.
C)The rate prevailing on the date of preparation of the balance sheet.
D)The spot rate

Question 17

Exposed assets are those translated at

A)Historical rate.
B)Average rate.
C)Current rate.
D)Current rate or average rate.

Question 18

This is not established method of translation

A)Current rate method.
B)Monetary/Non-monetary method.
C)Temporary meth
D)D. Current/Non-current method

Question 19

A positive exposure will lead to when the currency of the subsidiary company appreciates.

A)Translation gain.
B)Translation loss
C)Exchange gain.
D)Exchange loss.

Question 20

Translation loss may occur when

A)Exposed assets exceed exposed liabilities and foreign currency appreciates.
B)Exposed assets exceed exposed liabilities and foreign currency depreciates.
C)The subsidiary's balance sheet shows a loss.
D)The foreign currency depreciates.

Question 21

The following method cannot be used for managing translation exposure

A)Forward contract.
B)Option contract
C)Exposure netting.
D)Leading and lagging.

Question 22

Economic exposure does not deal with

A)Changes in real exchange rates.
B)Future cash flow of the firm
C)Expected exchange rate changes.
D)None of the above.

Question 23

The __________ refers to the orderly relationship between spot and forward currency exchange rates and the rates of interest between countries.

A)one-price rule
B)interest-rate parity
C)purchasing-power parity
D)exchange-power parity

Question 24

The __________ is especially well suited to offer hedging protection against transactions risk exposure.

A)forward market
B)spot market
C)transactions market
D)inflation-rate market

Question 25

A multinational company that is faced with mild interference up to complete confiscation of all assets is encountering__________.

A)translation risk exposure
B)transactions risk exposure
C)political risk exposure
D)a very bad day