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11) Assume Prime Ltd is a company that invests in various office property markets in Asia

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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