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Question
A U.S. firm is earning British pounds from its foreign subsidiary. A U.K. firm is earning dollars from its U.S. subsidiary. Neither firm can borrow at a cost-effective rate outside of its home country/currency. What kind of swap could be used to limit the FX risk of both firms and explain the payment flows involved (be specific)?
Answer
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Related questions
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A bond portfolio manager has a $25 million market value bond portfolio with a 6-year duration. The manager believes interest rates may increase 50 basis points. Which of the following could be used to help limit his risk?
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II. Buy bond futures contracts.
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A. I only
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A macro hedge is a hedge of a particular asset or liability exposure to a change in a macroeconomic variable.
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The bank's one-year repricing gap is (Million $)A. $425.B. $285.C. $74.D. $140.E. $66.
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Due to convexity problems, banks are actually better off using the simpler repricing model to manage interest rate risk rather than the duration model.
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The cash flow from the interest a bank receives on a long-term loan that is normally reinvested is called the runoff from the loan.
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If a bank has a negative repricing gap, falling interest rates increase profitability.
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In a bank's three-month maturity bucket, a 30-year ARM with a rate reset in six months would be considered a fixed rate asset, but in its one-year maturity bucket, this ARM would be considered a rate-sensitive asset.
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Explain how liquidity risk can lead to insolvency risk.
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A bank meets a deposit withdrawal with one of the following alternatives. Which one of the following is an example of using stored liquidity to meet a deposit withdrawal?A. Increase in Euro dollar depositsB. Contacting an investment banker to find new corporate depositsC. Increasing Fed funds borrowedD. Issuance of a negotiable CDE. Selling the bank's holdings of T-bills
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A. Class A
B. Class B
C. Class C
D. Class Z
E. All have the same duration
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B. the bonds had variable interest rates.
C. the bonds were marketable and the loans were not.
D. the bonds were uncollateralized.
E. none of the above
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Under current reserve requirements, bank loan sales with recourse are considered a liability and are subject to reserve requirements.
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A mortgage pass-through security is a bond issue backed by a group of mortgages that pays fixed semi-annual coupon payments where the principle is repaid only at maturity.