International Finance Management- Quiz I

Two types of market participants are necessary for a futures market to operate: speculators and hedgers. A speculator attempts to profit from a change in the futures price. A hedger wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or locking in a sales price through a short position.

A buyer in a futures contract is considered to be in a long position. This means that the buyer has agreed to purchase the underlying asset at a specified price and time in the future. By taking a long position, the buyer is expecting the price of the asset to increase, allowing them to profit from the price difference between the agreed upon price and the market price at the time of the contract's expiration.

European options can only be exercised at the maturity date, which means that the option holder can only exercise their right to buy or sell the underlying asset on the expiration date. On the other hand, American options can be exercised at any time during the contract period, giving the option holder more flexibility in choosing when to exercise the option.

Both forward and futures contracts are classified as derivative or contingent claim securities because their values are derived from or are contingent upon the value of the underlying asset - foreign currency. (p. 220)

A foreign branch operates similarly to a local bank but is legally considered a part of its parent bank. This means that it is subject to the banking regulations of both its home country and the country in which it operates. This characteristic distinguishes a foreign branch from other options mentioned in the question, such as a partially owned but not controlled entity, a country with a banking system allowing external accounts, or a small service facility for MNC clients.

Expiration dates are in the end of each quarter:
Q1 = March
Q2 = June
Q3 = September
Q4 = December

A subsidiary bank is a locally incorporated bank that is either wholly owned or owned in major part by a foreign parent. It operates under the banking laws of the country in which it is incorporated. This means that the subsidiary bank functions as a separate legal entity but is controlled by a foreign parent company. This arrangement allows the foreign parent to expand its operations into a new market while adhering to the local banking regulations and laws.

Bank capital adequacy refers to the amount of equity capital and other securities that a bank holds as reserves against risky assets. This is done in order to reduce the probability of a bank failure. By maintaining adequate capital reserves, banks are better equipped to absorb losses and continue operating even during periods of financial stress. This measure is important for ensuring the stability and soundness of the banking system, as it helps protect depositors and maintain public confidence in the banking sector.

Two types of market participants are necessary for a futures market to operate: speculators and hedgers. A speculator attempts to profit from a change in the futures price. A hedger wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or locking in a sales price through a short position.

The correct answer explains that a Eurocredit is a short-to-medium-term loan of Eurocurrency extended by Eurobanks. These loans are denominated in currencies other than the home currency of the Eurobank. This suggests that Eurocredits are a form of borrowing in a foreign currency, allowing Eurobanks to provide financing in different currencies to their clients.

Two types of market participants are necessary for a futures market to operate: speculators and hedgers. A speculator attempts to profit from a change in the futures price. A hedger wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or locking in a sales price through a short position.

Whenever the spot rate is less than the exercise price, the call option is said to be out-of-the-money. It the call is out-of-the-money at expiry, it has a value of zero.

The correct answer is "Sell BRL and buy CAD." In this situation, Bombardier needs to convert its receivable amount of BRL 5,000,000 into Canadian Dollars. By selling BRL and buying CAD, Bombardier can exchange its Brazilian Real for Canadian Dollars, allowing them to obtain the desired amount in CAD. This transaction helps Bombardier avoid the potential depreciation of the Brazilian Real by locking in the exchange rate through a forward contract.

The specific price at which the currencies will be exchanged at a specified future date is referred to as the strike price or exercise price.

A Representative Office is a small service facility that is staffed by personnel from the parent bank. Its main characteristic is that it is designed to assist multinational clients of the parent bank in their dealings with the bank's correspondents. This means that the representative office acts as a liaison between the multinational clients and the correspondents, helping to facilitate their transactions and communications. It provides support and assistance to the clients, ensuring smooth interactions with the bank's correspondents.

Variation margin must be added to the account to bring it back to the initial margin level in order to keep the position open. An investor who suffers a liquidity crunch and cannot deposit additional margin money will have his position liquidated by his broker.

A seller in a futures contract is considered to be in a short position. This means that they have agreed to sell the underlying asset at a predetermined price in the future. By taking a short position, the seller is betting that the price of the asset will decrease, allowing them to buy it back at a lower price and make a profit. This is in contrast to a long position, where the buyer agrees to purchase the asset at a future date, anticipating that its price will rise. A neutral position or a reverse position are not relevant terms in the context of a futures contract.

The main characteristic of a Correspondent Bank is that it is established when two banks maintain a correspondent bank account with one another. This means that large banks, which do not have their own operations in certain financial centers, establish relationships with other banks in those centers. They do this by maintaining correspondent bank accounts, which allows them to conduct financial transactions and provide services to their clients in those centers. This arrangement enables the banks to expand their reach and provide global banking services.

The main standar geatures of future contracts are contract size and maturity date of the contract. Futures contracts have specific delivery month during the yar in which contracts mature on a specified day of the month. (p 220)

The main characteristic of an Affiliate Bank is that it is partially owned but not controlled by its foreign parent. This means that the foreign parent has some ownership stake in the bank, but does not have full control over its operations. The Affiliate Bank also operates under the banking laws of the country in which it is incorporated, which means it must comply with the regulations and requirements set by that country's banking authorities. This allows the Affiliate Bank to operate independently within the legal framework of its host country while still maintaining some level of connection to its foreign parent.

Offshore Banking Centers are characterized by their banking systems that allow for external accounts beyond the regular economic activity of the country. This means that individuals and businesses can open accounts and conduct financial transactions that are not directly related to the country's domestic economy. These external accounts often provide advantages such as tax benefits, privacy, and asset protection. Offshore Banking Centers attract international clients and serve as financial hubs for global transactions, making them an important part of the global financial system.

A buyer of a future contract in which the settlement price is higher than the previous day's settlement price as a positive settlement for the day. Since a long position entitles the owner to purchase the underlying asset, a higher settlement price means the futures price of the underlying asset has increased. Consequently, a long position in the contract is worth more.

A Eurocommercial Paper is an unsecured short-term promissory note that is issued by a corporation or a bank. It is placed directly with the investment public through a dealer. This means that the issuer of the Eurocommercial Paper does not provide any collateral for the note, and it has a short-term maturity. The note is sold directly to investors through a dealer, bypassing the need for an intermediary. This makes it a convenient and efficient way for corporations or banks to raise short-term funds.

The correct answer is "It is a time deposit of money in an international bank located in a country different from the country that issued the currency." This answer accurately defines a Eurocurrency as a time deposit of money held in an international bank situated in a country other than the one that issued the currency. Eurocurrency is commonly used for international transactions and provides flexibility and ease of access to funds across different countries.

A buyer of a future contract in which the settlement price is lower than the previous day's settlement price as a negative settlement for the day. Since a long position entitles the owner to purchase the underlying asset, a lower settlement price means the futures price of the underlying asset has decreased. Consequently, a long position in the contract is worth less.

Bombardier is using a currency options contract. This type of contract gives the holder the right, but not the obligation, to buy or sell a specific amount of currency at a predetermined exchange rate, known as the strike price, on or before a specific date. In this case, Bombardier has the right to buy BRL, but they have chosen to decline this right due to the appreciation of the Brazilian Real against the Canadian Dollar. This allows Bombardier to potentially make profits by not exercising their right to buy BRL at a less favorable exchange rate.

1 - Traded competitively on a organized exchange
2 - Contract size is standardized amount of the underlying asset
3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
4 - Standardized delivery dates
5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
6 - Trading cost are bid-ask spread plus broker's commission

The interbank offered rate in a Eurocurrency market refers to the rate charged by banks with a surplus of Eurocurrency when lending to a Eurobank that is in need of loanable funds. This rate is applicable in the Eurocurrency market, where banks outside of the currency's home country accept deposits and make loans in that currency. The interbank offered rate is used as a benchmark for various financial products and serves as an important reference rate in the Eurocurrency market.

The correct answer is TIBOR. TIBOR stands for Tokyo Interbank Offered Rate, which is an interest rate benchmark used in Japan. It is not an interbank offered rate in the sense that it is not a globally recognized benchmark like LIBOR (London Interbank Offered Rate), SIBOR (Singapore Interbank Offered Rate), or PIBOR (Paris Interbank Offered Rate). TIBOR is specific to Japan and is used for determining interest rates on various financial instruments in the Japanese market.

1 - Traded competitively on a organized exchange
2 - Contract size is standardized amount of the underlying asset
3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
4 - Standardized delivery dates
5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
6 - Trading cost are bid-ask spread plus broker's commission

1 - Traded by bank dealers via a network of telephones and computerized dealing systems
2 - Contract size is tailor-made to the needs of the participant
3 - Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
4 - Tailor-made delivery date that meets the need of the investor
5 - Delivery of the underlying asset is commonly made
6 - Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

Whenever the spot rate is greater than the exercise price, the call option is said to be in-the-money. It the call option is in-the-money at expiry, the contract has a value.

1 - Traded competitively on a organized exchange
2 - Contract size is standardized amount of the underlying asset
3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
4 - Standardized delivery dates
5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
6 - Trading cost are bid-ask spread plus broker's commission

1 - Traded by bank dealers via a network of telephones and computerized dealing systems
2 - Contract size is tailor-made to the needs of the participant
3 - Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
4 - Tailor-made delivery date that meets the need of the investor
5 - Delivery of the underlying asset is commonly made
6 - Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

1 - Traded competitively on a organized exchange
2 - Contract size is standardized amount of the underlying asset
3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
4 - Standardized delivery dates
5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
6 - Trading cost are bid-ask spread plus broker's commission

1 - Traded competitively on a organized exchange
2 - Contract size is standardized amount of the underlying asset
3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
4 - Standardized delivery dates
5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
6 - Trading cost are bid-ask spread plus broker's commission

The main standardized features of future contracts are the contract size specifying the amount of the underlying foreign currency for future purchase or sale. (p 220)

A futures contract is similar to a forward contract but with a crucial distinction. A forward exchange contract is tailor-made for a client by his international bank; in contrast, a futures contract has standardized features and is exchange-traded, that is, traded oon organized exchanges rather over the counter. (p. 220)

1 - Traded by bank dealers via a network of telephones and computerized dealing systems
2 - Contract size is tailor-made to the needs of the participant
3 - Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
4 - Tailor-made delivery date that meets the need of the investor
5 - Delivery of the underlying asset is commonly made
6 - Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

Forward contract is the most suitable for this scenario. It is flexible to define a specific amount and maturity date.
Future contract doesn't allow a tailored maturity date.
Currency options is an opotion if the total amount is bigger than 100,000.

A forward contract states a price for the future transaction.

The commission that buyers and sellers pay to transact in the futures market is a single amount paid upfront that covers the round-trip transactions of initiating and closing out the position. These days, through a discount broker, the commission charge can be as little as $15 per currency futures contract.

A Euronote refers to a short-term note that is underwritten by a group of international investment or commercial banks, commonly referred to as a "facility". This means that these banks guarantee the repayment of the note. Euronotes are typically used as a source of short-term financing for corporations and banks.

1 - Traded competitively on a organized exchange
2 - Contract size is standardized amount of the underlying asset
3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
4 - Standardized delivery dates
5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
6 - Trading cost are bid-ask spread plus broker's commission

If the investor's margin account falls below a maintance margin level (roughly equal to 75% of the initial margin), variation margin must be added to the account to bring it back to the initial margin level in order to keep the position open.

The Eurocurrency market is less regulated than the domestic banking system. This means that there are fewer restrictions and regulations imposed on the Eurocurrency market compared to the regulations that govern domestic banking activities. The Eurocurrency market operates with more freedom and flexibility, allowing for greater ease of transactions and less oversight from regulatory authorities.

1 - Traded by bank dealers via a network of telephones and computerized dealing systems
2 - Contract size is tailor-made to the needs of the participant
3 - Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
4 - Tailor-made delivery date that meets the need of the investor
5 - Delivery of the underlying asset is commonly made
6 - Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

In a forward contract, there is typically no initial margin required. Unlike futures contracts, which are traded on exchanges and require initial margin to mitigate the risk of default, forward contracts are privately negotiated between two parties. The terms of the contract, including any margin requirements, are agreed upon by the parties involved. Therefore, it is possible for a forward contract to have no initial margin requirement.

Both forward and futures contracts are classified as derivative or contingent claim securities because their values are derived from or are contingent upon the value of the underlying asset - foreign currency. (p. 220)

The given answer states that "Options have no cost involved" is not a characteristic of currency options. This is because options typically involve a cost known as the premium, which is the price paid to acquire the option. The premium is the upfront cost that the holder pays to gain the right to buy or sell the underlying asset. Therefore, the statement contradicts the concept of options having a cost, making it the exception among the listed characteristics.