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FIN2601 Assignment 2 COMPLETE ANSWERS) Semester 2 2024
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FIN2601 Assignment 2 COMPLETE ANSWERS) Semester 2 2024 An equity swap involves the exchange of - preferred stock for common stock. -interest payments for an equity position in the counterparty's firm. -interest payments for payments linked to the degree of change in a stock index. -interes...

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  • September 24, 2024
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  • 2024/2025
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  • fin2601 assignment 2 complete answers semester 2

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FIN2601 Assignment 2 COMPLETE ANSWERS)
Semester 2 2024
An equity swap involves the exchange of
- preferred stock for common stock.
-interest payments for an equity position in the counterparty's firm.
-interest payments for payments linked to the degree of change in a
stock index.
-interest payments for newly issued stock by financial institutions. -
ANS-interest payments for payments linked to the degree of change in
a stock index.

Lizard National Bank purchases a three-year interest rate cap for a fee
of 2 percent of notional principal valued at $50 million, with an interest
rate ceiling of 11 percent and LIBOR as the index representing the
market interest rate. Assume that LIBOR is expected to be 9 percent, 12
percent, and 13 percent at the end of each of the next three years,
respectively. The total payments received (or paid) by Lizard, including
the initial fee, are $____.
-500,000
- −500,000
- −1,500,000
- 1,500,000 - ANS-500,000

The Bretton Woods Era was the era
-of free-floating exchange rates.
-of floating rates without boundaries, but subject to government
intervention.
-in which governments maintained exchange rates within 1 percent of
a specified rate.

, -in which exchange rates were maintained within 10 percent of a
specified rate. - ANS-in which governments maintained exchange rates
within 1 percent of a specified rate.

A system whereby exchange rates are market determined without
boundaries but subject to government intervention is called
-a dirty float.
-a free float.
-the gold standard.
-the Bretton Woods era. - ANS-a dirty float

A system whereby one currency is maintained within specified
boundaries of another currency or unit of account is a

-pegged system.
-free float.
-dirty float.
-managed float. - ANS-Pegged system

T/F A country that pegs its currency is still able to maintain complete
control over its local interest rates. - ANS-False

If the demand for British pounds ____, the pound will ____, other
things being equal.

increases; appreciate
decreases; appreciate
increases; depreciate
B and C - ANS-increases; appreciate

Beginning with an equilibrium situation, if European inflation suddenly
____ than U.S. inflation, this forced ____ pressure on the value of the
euro.

, becomes much higher; upward
becomes much higher; downward
becomes much less; upward
becomes much less; downward
B and C - ANS--Becomes much higher; downward
-Becomes much less; upward

T/F In reality, exchange rates do not always change as suggested by
purchasing power parity. - ANS-True

Which of the following statements is incorrect?

Central banks often consider adjusting a currency's value to influence
economic conditions.
If the U.S. central bank wishes to stimulate the economy, it could
weaken the dollar.
A weaker dollar could cause U.S. inflation by reducing foreign
competition.
Direct intervention occurs when the central bank influences the factors
that determine the dollar's value. - ANS-Direct intervention occurs
when the central bank influences the factors that determine the
dollar's value.

A ____ home currency can ____ domestic inflation.

strong; increase
weak; decrease
strong; decrease
A and B - ANS-strong; decrease

If the spot rate of the British pound is $2, and the 180-day forward rate
is $2.05, what is the annualized premium or discount?

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