tb08 - Kirt C. Butler, Multinational Finance, 3rd edition...

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Kirt C. Butler, Multinational Finance , 3 rd edition Chapter 8 Currency Swaps and Swaps Markets True/False 1. A currency swap is an agreement to exchange a principal amount of two different currencies and, after a pre-arranged length of time, to re-exchange the original principal. ANS: True. 2. Interest payments are typically exchanged during the life of a swap agreement. ANS: True. 3. Currency swaps are usually used to hedge short-term currency risks. ANS: False. Swaps usually involve long-term exposures to financial price risks. 4. An interest rate swap is a currency swap in which the principal amounts are in a single currency. ANS: True. 5. In an interest rate swap, the principal amount is called notional principal because it is used only to calculate interest payments and is not exchanged. ANS: True. 6. Currency forwards, futures, options, and swaps are derivative securities that are exposed to currency risk. ANS: True. 7. A parallel loan arrangement allows each company to borrow in its home market where it enjoys relatively low borrowing costs. ANS: True. 8. Parallel loans were created as a way to raise funds in foreign markets, while legally circumventing restrictions on cross-border currency transactions. ANS: True. 9. Parallel loans allow firms to raise funds in their domestic credit market. ANS: False. Parallel loans were created as a way to raise funds in foreign markets. 10. One problem with a parallel loan arrangement is that taxes must be paid as the principal crosses national borders. ANS: False. Parallel loans legally circumvent taxes on cross-border flows. 11. In a parallel loan, the corporation borrows funds directly in a foreign currency. ANS: False. Firms borrow in their own currency and then exchange debt with a foreign counterparty. 12. Parallel loans effectively eliminate default risk. ANS: False. Default risk is a major problem with parallel loans. 13. Parallel loans must appear on both sides of the consolidated balance sheet for accounting, tax, and regulatory purposes. ANS: True. 63
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Kirt C. Butler, Multinational Finance , 3 rd edition 14. Disputes can arise if one party defaults in a parallel loan agreement because each loan is a separate agreement. ANS: True. 15. If one party defaults in a swap, it does not release the other party from its obligation. ANS: False. Swaps combine all cash flows into a single legal contract.
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This note was uploaded on 12/07/2011 for the course FINS 3616 taught by Professor Curry during the One '10 term at University of New South Wales.

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tb08 - Kirt C. Butler, Multinational Finance, 3rd edition...

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