5. You currently have a variable-rate mortgage, and want a fixed-rate mortgage instead. Which derivative would you use to do this, without having to sell your home? (A) Forward. (B) Put option. (C) Swap. (D) Call option. 6. Which of the following is NOT a feature of a currency board? (A) It holds interest-bearing bonds in the anchor currency. (B) Commercial banks are obligated to maintain 100 percent coverage of their liabilities in the form of reserves. (C) Liabilities include the notes and coins that the currency board issues. (D) A central bank is not required.
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Suppose company ABC wants to borrow in a foreign currency. Which of the following agreements would best achieve that? Select one: a. A swap b. A forward-forward agreement c. A forward rate agreement d. A currency option
Akash M.
Traditionally firms raise capital in the primary market issuing either fixed or floating rate debt. Both bond structures expose the firm to interest rate risk. The financial derivatives market provides firms the opportunity to manage their interest rate risk of their bond portfolios as well potentially lowering the cost of borrowing. One of your firm's clients wants to issue a $100 million, 3-year maturity bond and has asked for guidance as to achieving the lowest fixed rate borrowing cost. Based on current bond market conditions the firms can: * Issue a 3-year, fixed rate bond (annual coupon payments) paying the 3-year US Treasury rate plus 250 basis points. The current 3-year US Treasury rate is 4.50%. or * Issue a 3-year floating rate bond paying (annually) the 1-year SOFR rate plus 200 basis points. The client's CFO asks whether they could lower their all-in fixed rate borrowing costs using an interest rate swap. As the junior derivatives analyst, you have been tasked with evaluating this situation and determining if the use of an interest swap would achieve the firm's goal. To that end you have identified a bank that offers the following interest rate swap: * Fixed Rate Leg: 3-year US Treasury rate plus 30 basis points. * Floating Rate Leg: 1-year SOFR You are to prepare a presentation for the client's CFO illustrating the financial structure that provides the lowest fixed rate borrowing cost as well the savings, if any, as a result of using an interest rate swap.
Use a diagram like Figure $17-6$ to explain how a central bank can alter the domestic interest rate, while holding the exchange rate fixed, under imperfect asset substitutability.
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