1. A firm that issues LT debt and then effectively wants to transform its debt to ST debt can do so by entering into an interest rate swap in which is pays fixed and receives floating.

A. True

B. False

2. Given a home country and a foreign country, relative purchasing power parity (RPPP) suggests that:

A. a home currency will appreciate nominally if the current home interest rate exceeds the current for foreign interest rate.

B. a foreign currency will appreciate nominally if the current home inflation rate exceeds the current for foreign inflation rate.

C. a foreign currency will depreciate nominally if the current home inflation rate exceeds the current for foreign inflation rate.

D. a home currency will depreciate nominally if the current home inflation rate exceeds the current for foreign interest rate.

3. Assume that Mexican investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Because of this, the MXN spot rate is likely to _________ and the MXN forward rate is likely to__________

A. Appreciate; appreciate

B. depreciate; depreciate

C. Appreciate; depreciate

D. depreciate; appreciate

4. holding other relevant factors constant, if the spot rate is $1.35/€ and the exercise price is $1.38/€, which option will have a higher premium?

A. Put option

B. Call option

C. Barrier option

D. Impossible to answer

5. Triangular arbitrage tends to enforce a relationship between the interest rates if two countries and their forward exchange rate premium or discount.

True

False

6. If you enter into a foreign currency swap (€ and $) in which you make LIBOR-€ payment throughout the life of the swap, at origination you will have a cash outflow denominated in dollars.

True

False