1. What is the difference between a spot and forward transaction? -A SPOT TRANSACTION IN THE INTERBANK MARKET IS THE PURCHASE OF FOREIGN EXCHANGE, WITH DELIVERY AND PAYMENT BETWEEN BANKS TO TAKE PLACE, NORMALLY, ON THE SECOND FOLLOWING BUSINESS DAY.

THE DATE OF SETTLEMENT IS REFERRED TO AS THE VALUE DATE.

-AN OUTRIGHT FORWARD TRANSACTION REQUIRES DELIVERY AT A FUTURE VALUE DATE OF A SPECIFIED AMOUNT OF ONE CURRENCY FOR A SPECIFIED AMOUNT OF ANOTHER CURRENCY.

THE EXCHANGE RATE IS ESTABLISHED AT THE TIME OF THE AGREEMENT, BUT PAYMENT AND DELIVERY ARE NOT REQUIRED UNTIL MATURITY.

Transactions within the FX market are executed either on a spot basis, requiring settlement 2 days after the transaction, or on a forward or swap basis, which requires settlement at some designated future date

2. What is swap transaction? What are spot-against forward and forward- forward swaps ?

A SWAP TRANSACTION IN THE INTERBANK MARKET IS THE SIMULTANEOUS PURCHASE AND SALE OF A GIVEN AMOUNT OF FX FOR TWO DIFFERENT VALUE DATES.

3. What is FX rate ?

A FX rate is the price of one currency expressed in terms of another currency. A FX quotation is a statement of willingness to buy or sell currency at the announced price

4. What are European terms and American terms ?

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5. u Example: Define the percent-per-annum premium or discount defined in foreign

and home currency terms?

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6. Calculate the long position for a FX future with the following input data:

Future March contract 2013 settle price: $.1100/Ps.

Spot exchange rate at maturity: $.1200/Ps.

Notational Principle: 1.000.000 Mex. Pesos

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7. Define foreign currency options (including the terminology: call vs. put and the 3 pricing elements of an option).

A FOREIGN CURRENCY OPTION IS A CONTRACT GIVING THE OPTION PURCHASER (THE BUYER) THE RIGHT, BUT NOT THE OBLIGATION, TO BUY OR SELL A GIVEN AMOUNT OF

FOREIGN EXCHANGE AT A FIXED PRICE PER UNIT FOR A SPECIFIED TIME PERIOD (UNTIL THE MATURITY DATE).

THERE ARE TWO BASIC TYPES OF OPTIONS, PUTS & CALLS.

v A Call is an Option to buy foreign currency

v A Put is an Option to sell foreign currency

Every Option has three different price elements:

v The exercise or strike price the exchange rate at which the foreign currency can be

purchased (Call) or sold (Put)

v The premium the cost, price, or value of the Option itself

v The underlying or actual spot exchange rate in the market

8. Speculation and Hedging Case:

Johny Cash and Nancy Lazy create with a couple of other students a hedge fund in Boston / US. They discuss alternative strategies to invest their funds in the spot market, in the forward market or in the options market to acquire . The todays morning conditions at the stock and derivative exchanges should be as follows:

Investment volume: $100.000

Spot rate 28.01.2013: $1.30/

6-month forward rate: $1.31/

Believe in 6-month spot rate: $1.40/ ( appreciation believe)

Strike Price 6 month Call Option on is $1,30/ with premium of 0,5 US cent/

Describe and Calculate different speculation strategies (Option-, Forward, Spot

Market,)

Spot market when the speculator believes the FX will appreciate in value

Forward market when the speculator believes the spot price at some Future date

will differ from todays Forward price for the same date

Options markets extensive differences in risk patters produced depending on

purchase or sale of Put and/or Call

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9. Define CREDIT RISK and REPRICING RISK

Credit risk (roll-over risk) is the possibility that a borrowers credit worthiness, at the

time of renewing a credit, is reclassified by the lender (resulting in changes to fees, interest rates, credit line commitments or even denial of credit).

Repricing risk is the risk of changes in interest rates charged (earned) at the time a

financial contracts rate is reset.

10. Which of the following Finance Strategies has a Credit and/or repricing risk?

Finance Strategy 1: Borrow $1 m for 3 years at a fixed rate of interest.

Finance Strategy 2: Borrow $1 m for 3 years at a floating rate, LIBOR +2%

Finance Strategy 3: Borrow $1 m for 1 year, then renew credit line

But not sure

Strategy one : credit risk

Strategy two : repricing risk

Strategy three : credit risk

11. Define the total Cash flows (and AIC) servicing the following floating rate loan

v 3-year, floating-rate loan

v Loan amount: 10m

v Fee (Disagio): 2%

v LIBOR (Base case): 8% in all 3 years

v Spread: 2%