1. Which of the following is TRUE about the differences between the onshore and offshore money markets?

a. Offshore markets are more regulated than onshore markets.
b. Participants in the offshore are mainly known and credit-worthy firms.
c. Interest rate spread is often larger in the offshore markets than onshore markets.
d. Onshore markets are more cost efficient than offshore markets.
2. One basis point is a. 1.00%.
b. 0.10%.
c. 0.01%.
d. 0.0001%.

3. The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could

a. sell an interest rate futures contract of a similar maturity to the loan.
b. buy an interest rate futures contract of a similar maturity to the loan.
c. swap the adjustable rate loan for another of a different maturity.
d. sell an FRA of a similar maturity to the loan.

4. Which of the following would be considered an example of a currency swap?

a. Exchanging a dollar interest obligation for a British pound interest obligation.
b. Exchanging an A/P in British pound for an A/P in U.S. dollars.
c. Exchanging an A/P in euro for an A/P in U.S. dollars.
d. Exchanging a specific amount of euros for a specific amount of euros.

5. A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to

a. pay fixed-rate interest and receive floating rate interest.
b. pay floating rate and receive fixed rate.
c. pay fixed rate and receive fixed rate.
d. pay floating rate and receive floating rate.

6. The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to

a. do nothing.
b. pay floating and receive fixed.
c. pay fixed and receive floating.
d. buy Eurodollar futures contract.

7. Today you bought (long) a Eurodollar futures contract (contract size: $1 million) at 96.54. Two days later you sold the contract at 96.74. As a result (please ignore the margins),

a. you received $500 in cash and paid $1 million to the buyer.
b. you paid $500 in cash and received $1 million from the buyer.
c. you received $500 in cash and closed your position on the futures contract.
d. you paid $500 in cash and closed your position on the futures contract.

8. The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:

a. interest rate risk.
b. counterparty risk.
c. clearinghouse risk.

9. A bank sells a "three against twelve" FRA for $1 million at a rate of 8%. In three months the FRA settles at 7.5%. There are 273 days in the FRA period. How much cash does the bank pay or receive?

a. Pays $3,587.62
b. Receives $3,587.62 c. Pays £3,587.62
d. Receives £3,587.62

10. A bank needs to borrow $10 million in three months for a nine-month period. It buys a "three against twelve" FRA for $10 million at a rate of 8% to hedge its exposure. In three months the FRA settles at 7.5%. There are 273 days in the FRA period. What is the bank's net borrowing cost for the 273 days (at an annualized rate)?

a. 7.25%
b. 7.50%
c. 7.75%
d. 8.00%

11. A firm needs to invest $2,000,000 three months from today for three months. Which of the following is a correct strategy to hedge its interest rate exposure?

a. Buy an FRA that is comparable in maturity with the planned investment.
b. Sell an FRA that is comparable in maturity with the planned investment.
c. Buy Eurodollar futures contracts that are comparable in maturity with the planned investment.
d. Enter a swap that the firm pays floating and receive fixed.

12. A firm buys "three against six" FRA at 7.5% (annualized) with the notional principal of $2 million. On the settlement date, the interest rate in the market is 9%. How much is the firm cash settlement for the FRA? (Assume dtm is 91 days.)

Refer to the following CME Eurodollar futures information for Questions 13 to 17.

13. What is the yield or interest rate for the Dec '15 contract?

14. What does the yield or interest rate for the Dec '15 contract mean?

a. An annualized interest rate for the period from December 2015 to March 2016.
b. An annualized interest rate for the period from December 2015 to June 2016.
c. An annualized interest rate for the period from December 2015 to September 2016.
d. An annualized interest rate for the period from December 2015 to December 2016.

15. If you plan to make a short-term investment of $10 million for a period from June 2015 to September 2015, how do you hedge your exposure using Eurodollar futures?

a. Buy 10 Sep '15 Eurodollar futures contracts.
b. Sell 10 Sep '15 Eurodollar futures contracts.
c. Buy 10 Jun '15 Eurodollar futures contracts.
d. Sell 10 Jun '15 Eurodollar futures contracts.

16. If you plan to borrow a short-term loan of $10 million for a period from June 2015 to September 2015, how do you hedge your exposure using Eurodollar futures?

a. Buy 10 Sep '15 Eurodollar futures contracts.
b. Sell 10 Sep '15 Eurodollar futures contracts.
c. Buy 10 Jun '15 Eurodollar futures contracts.
d. Sell 10 Jun '15 Eurodollar futures contracts.

17. If you believe that the 3-month Eurodollar interest rate in December 2015 will be more than 1%, how do you establish a position to bet on your expectation?

a. Buy Dec '15 Eurodollar futures contracts.
b. Sell Dec '15 Eurodollar futures contracts.
c. Buy Sep '15 Eurodollar futures contracts.
d. Sell Sep '15 Eurodollar futures contracts.

Refer to the following CME Eurodollar futures information for Questions 18 to 20.

Assume that it is now December and that one month means 30 days (3 months 90 days, 6 months 180 days, and 9 months 270 days, and 90 days between December and March, between March and June) and the interest rates are annualized on 360-day basis.

18. If you invest for 3 months at 0.70% and buy March Eurodollar futures to hedge your reinvestment for another 3 months. What is your annualized return (360-day basis) for your 6-month investment?

19. If you invest for 3 months at 0.70%, buy March Eurodollar futures to hedge your reinvestment for another 3 months, and then buy June Eurodollar futures to hedge your reinvestment for another 3 months. What is your annualized return (360-day basis) for your 9-month investment?

20. What is the implied forward rate for the 3-month annualized interest rate in June from the given investment returns in the table?