problem 1:

Make a distinction fully between an Interest Rate Swap and a Currency Swap. Why do swaps exist?

problem2:

Assume Firm X is able to obtain a $ bank loan with a term to maturity of six (6) years against LIBOR + 0.25%.  It can as well issue fixed rate $ bonds with a term to maturity of six years against nine per cent p.a.  Firm Y with a lower credit rating can attract a similar $ bank loan against LIBOR + 0.75 per cent and issue $ bonds against 10.25 % p.a. Suppose X insists on a net gain of 40 basis points (0.4 %), would a swap be possible between X and Y?  describe the flows clearly if any.

problem 3:

Derive and illustrate out:

i) The International Fisher Effect

ii) The Interest Rate Parity Theorem

iii) The Unbiased Forward Rate Theory

iv) The Fisher effect

problem 4:

Outline and illustrate the main differentiations between forward and futures contracts.

problem 5:

What do you understand by foreign exchange exposure? What are the potential methods a firm might use to hedge foreign exchange rate risk?