2.4 Money Markets and Foreign Exchange Flashcards
Risks of depositing cash overseas
- FX risk
- Witholding tax
- Exchange controls restricting repatriation
Most common T bill maturity
3 month
T Bill minimum denomination
£25,000
How long is CP issued in UK and US
US-up to 270 days
UK- up to 1 year
Commercial paper features
Issued by companies with 0 coupon and discounted
Unsecured short term debt, up to 1 year (typically 3 months)
Term repo
maturity date in excess of overnight
what is 1 pip
0.0001
What is 10 pips
0.001
What does GBP against USD for spot 1.5010/1.5015 mean
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
How to apply pips in forward
If pips decreasing, deduct
If pips increasing, add
Interest rate parity formula
F/S= 1+r(variable)/ 1+r(base)
F= forward rate
S= Spot rate
Which of the following currencies is used to calculate cross rates for transactions from one unusual currency to another?
US dollars
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.
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.
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?
Sell USD/Buy JPY six-month forward
What is the delivery time for a spot FX transaction after the trade date?
Two business days
When is settlement for eurobond transactions?
Two business days
Remember also that settlement for UK corporate debt is T+2 and for gilts is T+1.
On the creation of an ADR, in whose name is the document registered?
An ADR, although a bearer document, is registered in the name of the depository who holds the shares.
Which ONE of the following statements regarding forward foreign exchange transactions is FALSE?
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.
Which of the following is true of the dividends paid on the underlying shares of an ADR?
They are paid by the company to the depository bank
Interest is usually paid on Eurobonds:
Annually
The currencies of the United Arab Emirates and Saudi Arabia are pegged to the US Dollar. What are these examples of?
A fixed exchange rate
Which of the following statements is true of American depositary receipts?
They are freely-transferable if in the name of a good nominee, such as the Depository Trust Corporation
If a UK based REIT pays at least 90% of the rental income to shareholders, then the REIT will not need to pay:
Corporation tax
The £ vs. $ rate is currently $1.5585 - 1.5595. The sterling equivalent of converting $100,000 is:
DIFF WHEN IT SAYS CONVERTING
We would buy sterling at $1.5595. Therefore: $100,000/1.5595 = £64,123.
Which of the following is NOT true of equity warrants?
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.
Which of the following are true of eurobonds?
Interest is usually paid before the deduction of withholding tax
They are usually in bearer form
What is the correct form for collateral if ADRs are to be traded in pre-release format?
Cash
Which of the following is true of call options but not true of warrants?
On exercise they do not dilute the shareholding
Which of the following is correct in relation to the transferability of American depositary receipts (ADRs)?
They are freely-transferable if in a ‘good marking name’
Warrants vs Options
Exercise of a warrant is against the company.
Exercise of an option is against the writer of the option.
Which of the following is true of the currency markets?
London is the largest centre for trading
