2.4 Money Markets and Foreign Exchange

Question 1

Risks of depositing cash overseas

Answer 1

• FX risk
• Witholding tax
• Exchange controls restricting repatriation

Question 2

Most common T bill maturity

Answer 2

3 month

Question 3

T Bill minimum denomination

Answer 3

£25,000

Question 4

How long is CP issued in UK and US

Answer 4

US-up to 270 days
UK- up to 1 year

Question 5

Commercial paper features

Answer 5

Issued by companies with 0 coupon and discounted

Unsecured short term debt, up to 1 year (typically 3 months)

Question 6

Term repo

Answer 6

maturity date in excess of overnight

Question 7

what is 1 pip

Answer 7

0.0001

Question 8

What is 10 pips

Answer 8

0.001

Question 9

What does GBP against USD for spot 1.5010/1.5015 mean

Answer 9

First means sell base - £1 buys $1.5010

Second means buy base- $1.5015 buys £1

First is bid price (lower price) which is sell price

Question 10

How to apply pips in forward

Answer 10

If pips decreasing, deduct

If pips increasing, add

Question 11

Interest rate parity formula

Answer 11

F/S= 1+r(variable)/ 1+r(base)

F= forward rate
S= Spot rate

Question 12

Which of the following currencies is used to calculate cross rates for transactions from one unusual currency to another?

Answer 12

US dollars

Question 13

Consider the three following property transactions:
Andy purchases a buy-to-let residential property, then leases it out.
Martin leases a residential property.
Sarah leases a commercial property.

Answer 13

Sarah will typically have a longer lease than Martin

Andy is the only one generating income on the property, so is the only one exposed to void periods.

The lessor of residential property (Andy) and the lessee of commercial property (Sarah) are typically responsible for the upkeep (maintenance) of the property.

Question 14

A Japanese exporter is concerned over volatility in USD/JPY and wants to hedge receivables due from sales made in the US. A large US dollar receipt is due to come in around six months’ time and the amount is known now.
What would you advise the exporter to do to hedge out this risk?

Answer 14

Sell USD/Buy JPY six-month forward

Question 15

What is the delivery time for a spot FX transaction after the trade date?

Answer 15

Two business days

Question 16

When is settlement for eurobond transactions?

Answer 16

Two business days

Remember also that settlement for UK corporate debt is T+2 and for gilts is T+1.

Question 17

On the creation of an ADR, in whose name is the document registered?

Answer 17

An ADR, although a bearer document, is registered in the name of the depository who holds the shares.

Question 18

Which ONE of the following statements regarding forward foreign exchange transactions is FALSE?

Answer 18

Non-deliverable forwards are settled at the forward rate

In a non-deliverable forward, the exchange rate is set for some date in the future, but at that date the quoted currency is not exchanged. Instead, the rate is compared against the prevailing spot rate. The profit or loss is calculated as if a reverse transaction had been completed. This is the amount that is settled.

Question 19

Which of the following is true of the dividends paid on the underlying shares of an ADR?

Answer 19

They are paid by the company to the depository bank

Question 20

Interest is usually paid on Eurobonds:

Answer 20

Annually

Question 21

The currencies of the United Arab Emirates and Saudi Arabia are pegged to the US Dollar. What are these examples of?

Answer 21

A fixed exchange rate

Question 22

Which of the following statements is true of American depositary receipts?

Answer 22

They are freely-transferable if in the name of a good nominee, such as the Depository Trust Corporation

Question 23

If a UK based REIT pays at least 90% of the rental income to shareholders, then the REIT will not need to pay:

Answer 23

Corporation tax

Question 24

The £ vs. $ rate is currently $1.5585 - 1.5595. The sterling equivalent of converting $100,000 is:

Answer 24

DIFF WHEN IT SAYS CONVERTING

We would buy sterling at $1.5595. Therefore: $100,000/1.5595 = £64,123.

Question 25

Which of the following is NOT true of equity warrants?

Answer 25

They may pay a fixed or variable income

Warrants are only issued by companies, and generate cash for the company on exercise. They are all listed on the LSE and can be traded there, though in practice many warrants are traded OTC.

Warrants are not shares, and so do not pay any dividend to the holder.

Question 26

Which of the following are true of eurobonds?

Answer 26

Interest is usually paid before the deduction of withholding tax

They are usually in bearer form

Question 27

What is the correct form for collateral if ADRs are to be traded in pre-release format?

Answer 27

Cash

Question 28

Which of the following is true of call options but not true of warrants?

Answer 28

On exercise they do not dilute the shareholding

Question 29

Which of the following is correct in relation to the transferability of American depositary receipts (ADRs)?

Answer 29

They are freely-transferable if in a ‘good marking name’

Question 30

Warrants vs Options

Answer 30

Exercise of a warrant is against the company.
Exercise of an option is against the writer of the option.

Question 31

Which of the following is true of the currency markets?

Answer 31

London is the largest centre for trading