Question 1

Zero coupon swap is an arrangement

Accepted Answer

A zero coupon swap involves one party making a lump sum payment at the end of the agreement, rather than periodic payments.

Question 2

The acronym CIRCUS stands for

Accepted Answer

CIRCUS stands for Combined Interest Rate and Currency Swap, which is a financial instrument involving the exchange of interest rates and currencies between two parties.

Question 3

A forward rate agreement helps the user to

Accepted Answer

A forward rate agreement (FRA) allows the user to lock in an interest rate for a future period, effectively fixing the cost of borrowing for that period.

Question 4

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

Accepted Answer

Interest rate swaps involve the exchange of interest payments between two parties without exchanging the principal amounts. This allows parties to exchange fixed for floating interest rates, or vice versa, to manage exposure to interest rate fluctuations.

Question 5

An interest rate cap is a series of

Accepted Answer

An interest rate cap is a series of European call options (or caps) on a specified interest rate, typically used to protect against rising interest rates.

Question 6

FRAs can't+ be used for

Accepted Answer

Forward Rate Agreements (FRAs) can be used for hedging, arbitraging, and speculating, making none of the options correct limitations of their use.

Question 7

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

Accepted Answer

The true cost of hedging using the forward market is the difference between the agreed forward rate and the spot rate on the due date of the contract, as this reflects the actual cost or benefit realized when the contract is settled.

Question 8

Hedging with options is best recommended for

Accepted Answer

Hedging with options is particularly suitable for hedging contingency exposures because options provide the right but not the obligation to buy or sell an asset. This flexibility is ideal for exposures that may or may not occur, such as bids, contracts, or potential acquisitions, where the firm wants protection without committing to a definite transaction as required with forwards or futures.

Question 9

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

Accepted Answer

The answer of A firm operating in India cannot hedge...

Question 10

Foreign currency exposures can be avoided by

Accepted Answer

The answer of Foreign currency exposures can be avoided by
...

Question 11

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

Accepted Answer

Denominating in domestic currency does not share the exchange risk between the importer and exporter. Instead, it places the entire exchange risk on the party dealing in a foreign currency, as the transaction is entirely in one party's domestic currency.

Question 12

Leading refers to

Accepted Answer

Leading refers to the practice of advancing payments, which can apply to either receivables or payables, to take advantage of favorable conditions.

Question 13

Translation exposure arises in respect of items translated at

Accepted Answer

The answer of Translation exposure arises in respect of items...

Question 14

Translation loss is

Accepted Answer

Translation loss is considered a notional loss because it arises from the process of converting financial statements from one currency to another during consolidation, rather than from actual cash transactions.

Question 15

The translation exposure is positive when

Accepted Answer

Translation exposure is positive when the value of exposed assets exceeds the value of exposed liabilities, as this indicates a potential increase in a company's net assets due to currency translation.

Question 16

For the purpose of translations, current rate refers to

Accepted Answer

The current rate for translation purposes is typically the rate prevailing on the date of the balance sheet, as it reflects the most recent exchange rate applicable for financial reporting.

Question 17

Exposed assets are those translated at

Accepted Answer

Exposed assets are typically translated at the current rate because their value can fluctuate with changes in the exchange rate. This approach reflects the most up-to-date value of these assets in the financial statements.

Question 18

This is not established method of translation

Accepted Answer

The "Temporary method" is not an established method of translation in accounting or finance. The recognized methods include the Current rate method, Monetary/Non-monetary method, and Current/Non-current method.

Question 19

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

Accepted Answer

When the currency of the subsidiary appreciates, a positive exposure results in a translation gain as the value of the subsidiary's assets increases when converted to the parent company's currency.

Question 20

Translation loss may occur when

Accepted Answer

Translation loss occurs when exposed assets exceed exposed liabilities and the foreign currency depreciates. This is because the value of the assets in the parent company's currency decreases, leading to a loss when translated.

Quiz 2: Foreign Exchange and Hedging Exposures