Started on Saturday, 20 April 2019, 12:21 PM

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Completed on Saturday, 20 April 2019, 12:43 PM
Time taken 22 mins 11 secs
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Question 1
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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 1.8000?
Select one:
a. counterparty A 
b. counterparty B
c. neither counterparty

d. both counterparty A and counterparty B

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The correct answer is: counterparty A

Question 2
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A cross currency interest rate swap involves:

Select one:
a. two fixed or floating interest rates on two currencies, neither of which is the U.S.
dollar
b. two fixed interest rates on two currencies
c. two floating interest rates on two currencies

d. a fixed interest rate on one currency and a floating interest rate on another
currency 

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The correct answer is: a fixed interest rate on one currency and a floating interest
rate on another currency

Question 3
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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?
Select one:
a. counterparty B
b. both counterparty A and counterparty B
c. counterparty A 

d. neither counterparty

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The correct answer is: counterparty B

Question 4
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In currency futures trading, the settlement exchange rate is the:

Select one:
a. closing exchange rate
b. average of the high and low exchange rates
c. exchange rate upon which marking-to-market is based 

d. opening exchange rate

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The correct answer is: exchange rate upon which marking-to-market is based

Question 5
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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?
Select one:
a. USD10 000 
b. AUD10 000
c. –USD10 000

d. –AUD10 000

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The correct answer is: USD10 000

Question 6
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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?
Select one:
a. USD10 000
b. AUD10 000
c. –USD10 000 

d. –AUD10 000

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The correct answer is: –USD10 000

Question 7
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Marking-to-market risk of futures trading arises from:

Select one:
a. variable transaction costs
b. the effect of unpredictable changes in the interest rate on the margin account 
c. all of the given answers
d. daily exchange rate volatility

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The correct answer is: the effect of unpredictable changes in the interest rate on
the margin account

Question 8
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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?
Select one:
a. –USD10 000
b. USD10 000 
c. AUD10 000

d. –AUD10 000

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The correct answer is: USD10 000

Question 9
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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 one.
Select one:
a. B pays A USD2,000 
b. A pays B AUD2,000
c. A pays B USD2,000

d. B pays A AUD2,000

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The correct answer is: B pays A USD2,000

Question 10
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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 0.5100. How much will the firm gain or lose
on the forward contract?
Select one:
a. USD10 000
b. AUD10 000
c. –USD10 000 

d. –AUD10 000

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The correct answer is: –USD10 000

Question 11
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Suppose that a trader buys one three-month Australian dollar forward contract on 1
February at 0.5662 (USD/AUD).  
On successive days the following may happen as the settlement exchange rate
changes (in accordance with the spot rate):

Date Settlement Rate Value of Contract Margin Account (credit/debit)

2 Feb 0.57 57,000 380

3 Feb 0.5815 58,150 1,150

4 Feb 0.575 ??? ???

Calculate the value of the contract at 4th February and the credit or debit to the
margin account on the 4th February.
Select one:
a. 57,500 and -650 
b. 57,500 and -880
c. 57,500 and +650

d. 57,500 and +880

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The correct answer is: 57,500 and -650

Question 12
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Question text

Futures markets are used primarily for:

Select one:
a. position taking
b. trading
c. speculation 

d. hedging

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The correct answer is: speculation

Question 13
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What does ISDA stand for?

Select one:
a. Investor Security Development Association
b. International Swaps and Derivatives Association 
c. International Securities Dealers Association

d. International Securities and Derivatives Association

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The correct answer is: International Swaps and Derivatives Association

Question 14
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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?
Select one:
a. counterparty A
b. neither counterparty
c. both counterparty A and counterparty B

d. counterparty B 

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The correct answer is: counterparty B

Question 15
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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?
Select one:
a. both counterparty A and counterparty B
b. counterparty B 
c. neither counterparty

d. counterparty A
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The correct answer is: counterparty B

Question 16
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Two important functions carried out by futures markets are:

Select one:
a. both risk transfer and settlement of future exchange rate transactions
b. both price discovery and risk transfer 
c. both price discovery and research

d. both price discovery and settlement of future exchange rate transactions

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The correct answer is: both price discovery and risk transfer

Question 17
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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 three.
Select one:
a. A pays B AUD4,000
b. B pays A AUD4,000
c. B pays A USD4,000

d. A pays B USD4,000 

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The correct answer is: A pays B USD4,000

Question 18
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In futures trading, a limit move occurs when:

Select one:
a. the limit on the price of the contract is changed
b. the price of the contract hits the specified limit 
c. a limit is imposed on the number of daily transactions

d. the limit on the number of contracts a trader can hold at any point in time is
changed

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The correct answer is: the price of the contract hits the specified limit

Question 19
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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?
Select one:
a. neither counterparty 
b. both counterparty A and counterparty B
c. counterparty B

d. counterparty A

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The correct answer is: neither counterparty

Question 20
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Futures contracts can circumvent the problematic features of forward contracts

except the problem that they:
Select one:
a. lack liquidity
b. have a high risk of default
c. are not standardised

d. have short maturities 

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The correct answer is: have short maturities

Question 21
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In a parallel loan, the interest payments and the repayment of principal are based
on:
Select one:
a. an exchange rate that is agreed upon in advance
b. the forward exchange rate 
c. the exchange rate prevailing when the payment is due

d. the expected spot exchange rate

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The correct answer is: the forward exchange rate

Question 22
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Consider a 3-year interest rate swap with a notional principal of AUD100,000,

whereby A receives annual payments based on a floating interest rate and B
receives annual payments based on a fixed rate of 5%pa. The floating interest rates
on each payment date assume the values 6%, 5% and 4%. Calculate the cash
flows in year three.
Select one:
a. B pays A AUD1,000
b. A pays B USD1,000
c. B pays A USD1,000

d. A pays B AUD1,000 

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The correct answer is: A pays B AUD1,000

Question 23
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Suppose that two counterparties, A and B, enter a three-month forward contract on

1 January, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. On
1 March, A decides it no longer needs to sell USD1 million on 31 March, so it enters
a one-month forward contract to buy USD1 million on 31 March at a forward rate of
AUD/USD 1.8000 from counterparty C. Calculate the net cost to counterparty A,
before transaction costs.
Select one:
a. AUD1.8 million
b. AUD33 800
c. 0.0338

d. -AUD33 800 

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The correct answer is: -AUD33 800

Question 24
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A basis swap involves:

Select one:
a. two fixed interest rates
b. none of the given answers
c. both two variable interest rates and two fixed interest rates

d. two variable interest rates 

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The correct answer is: two variable interest rates

Question 25
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The difference between a currency swap and a foreign exchange swap is that:
Select one:
a. in the foreign exchange swap, only interest payments are exchanged
b. in the foreign exchange swap, only the principal amount is exchanged, whereas
in a currency swap, a principal amount is usually exchanged at the outset and
repayments occur over time involving both principal and interest 
c. in the currency swap, only the principal amount is exchanged

d. in the currency swap, only interest payments are ever exchanged

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The correct answer is: in the foreign exchange swap, only the principal amount is
exchanged, whereas in a currency swap, a principal amount is usually exchanged at
the outset and repayments occur over time involving both principal and interest

Question 26
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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:
Select one:
a. depreciation of the Australian dollar and a loss incurred by A 
b. depreciation of the euro and a loss incurred by A
c. appreciation of the euro and a loss incurred by B

d. appreciation of the Australian dollar and a loss incurred by B

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The correct answer is: depreciation of the Australian dollar and a loss incurred by A

Question 27
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Which of the following is NOT a means whereby the default risk is controlled in
futures trading?
Select one:
a. implementing daily settlement and margin requirements
b. the clearing corporation acting as the counterparty to all contracts
c. imposing daily limits on price movements

d. only low-risk participants are allowed to trade 

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The correct answer is: only low-risk participants are allowed to trade

Question 28
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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.
Select one:
a. B pays A USD2,000
b. none of the given answers
c. no net payment is required 

d. A pays B USD2,000

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The correct answer is: no net payment is required

Question 29
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An over-the-counter market is:
Select one:
a. an organised market where buyers meet face-to-face
b. a market comprised of a network of buyers and sellers executing transactions by
means of telecommunications 
c. a market conducted over-the-counter at bank branches

d. a market conducted solely via the internet

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The correct answer is: a market comprised of a network of buyers and sellers
executing transactions by means of telecommunications

Question 30
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Theoretically, arbitrage ensures that:

Select one:
a. the offer forward rate is equal to the futures bid rate 
b. the bid-offer spread in the forward and futures markets are equal
c. the futures offer rate is equal to the futures bid rate

d. the offer forward rate is equal to the futures offer rate

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The correct answer is: the offer forward rate is equal to the futures bid rate

Question 31
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In a currency swap involving A receiving Australian dollar payments and B receiving
euro payments, a rise in the actual exchange rate expressed as (EUR/AUD) implies:
Select one:
a. appreciation of the euro and a loss incurred by B
b. appreciation of the Australian dollar and a loss incurred by B 
c. depreciation of the euro and a loss incurred by A

d. depreciation of the Australian dollar and a loss incurred by A

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The correct answer is: appreciation of the Australian dollar and a loss incurred by B

Question 32
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A money market swap is:

Select one:
a. a swap with a maturity of three years or less 
b. a swap involving interest rates on two money market instruments
c. a swap involving the yields on money and Treasury bills

d. a swap involving the yields on money and bonds

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The correct answer is: a swap with a maturity of three years or less

Question 33
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Question text

In a currency swap, the interest payments and repayment of the principal are
based on:
Select one:
a. an exchange rate that is agreed upon in advance 
b. the exchange rate prevailing when the payment is due
c. the expected spot exchange rate

d. the forward exchange rate

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The correct answer is: an exchange rate that is agreed upon in advance

Question 34
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Suppose that two counterparties, A and B, enter a three-month forward contract on

1 January, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662. On
1 March, A decides it no longer needs to buy USD1 million on 31 March, so it enters
a one-month forward contract to sell USD1 million on 31 March at a forward rate of
AUD/USD 1.8000 from counterparty C. Calculate the net cost to counterparty A,
before transaction costs.
Select one:
a. AUD33 800 
b. AUD1.8 million
c. -AUD33 800

d. 0.0338

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The correct answer is: AUD33 800

Question 35
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An option on a swap is a contract that gives the holder the right to:
Select one:
a. swap one option for another
b. engage in a specified swap 
c. terminate the swap without paying a penalty

d. buy out the swap

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The correct answer is: engage in a specified swap