1. What is the difference between a spot and forward transaction?

2. -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

3. What is swap transaction? What are spot-against forward and forwardforward 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.

4. 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

5.

What are European terms and American terms ?

Slide 30

6. u Example: Define the percent-per-annum premium or discount

defined in foreign
and home currency terms?
Slide 37
7. 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
Lecture 4 slide 11

8. 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

9. 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
from slide 19 till 32 lecture 4
10.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.
11.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

12.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%