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11) Assume Prime Ltd is a company that invests in various office property markets in Asia
11) Assume Prime Ltd is a company that invests in various office property markets in Asia. To fund these property acquisitions, Prime Ltd uses, fixed rate mortgage loans in the currency of the country in which the property was acquired. What risk(s) are Prime Ltd. Faced with in the way it funds its office property acquisitions?
Group of answer choices
Both a and b
Foreign exchange rate risk
Price risk
Interest rate risk
12. Which of the following describes what a company should do to create a range forward contract in order to hedge foreign currency that will be received?
Group of answer choices
Buy a put and sell a call on the local currency with the strike price of the put higher than that of the call
Buy a call and sell a put on the foreign currency with the strike price of the put lower than that of the call
Buy a call and sell a put on the local currency with the strike price of the put higher than that of the call
Buy a put and sell a call on the foreign currency with the strike price of the put lower than that of the call
13. Probio Ltd, an Australian biomedical firm, wishes to borrow US dollars at a floating rate of interest while Shale Inc., a US investment firm, wishes to borrow Australian dollars at a fixed rate of interest. The companies have been quoted the following interest rates. The dealer requires 20 basis points per annum.
USD AUD
Probio Ltd: LIBOR + 3.0% 7.5% Fixed
Shale Inc: LIBOR + 1.5% 6.8% Fixed
If Probio Ltd. and Shale Inc. enter a swap with the dealer, how much would Shale Inc. pay the dealer?
Group of answer choices
AUD 6.3% Fixed
AUD 6.5% Fixed ?picked)
USD floating LIBOR + 1.5%
USD floating LIBOR + 1.2%
14. Assume that BHP plans to borrow $10 million in two months’ time using 180-day bank accepted bills and plans to use FRAs to hedge the interest rate risk. If 2 x 8 FRAs are being quoted at 4.65%, what is the gain (loss) on a hedging strategy using an FRA if the market rate of interest in two months’ time is 4.95%?
Group of answer choices
Gain of $7,225
Loss of $7,225
Gain of $14,119
Loss of $14,119
Expert Solution
11. the company borrows in Foriegn at fix rate it is facing the interst rate risk as well as foriegn exchage risk.
Interest rate risk :-
Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market. The sensitivity depends on two things, the bond's time to maturity, and the coupon rate of the bond.
Exchange Rate Risk:-
Exchange rate risk, also known as currency risk, is the financial risk arising from fluctuations in the value of a base currency against a foreign currency in which a company or individual has assets or obligations.
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