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9. Other types of derivatives There are several different types of derivative securities, including forwards, futures, swaps, inverse floaters, and structured notes. These securities may
9. Other types of derivatives There are several different types of derivative securities, including forwards, futures, swaps, inverse floaters, and structured notes. These securities may be used to manage the risks of business organizations or to speculate on certain market events. Consider the descriptions or characteristics in the following table and indicate the type of derivative to which each corresponds: Type of Derivative Description or Characteristic The most common form of this type of derivative involves counterparty A making a fixed- rate interest payment to counterparty B while receiving a floating-rate interest payment from the counterparty, and vice versa. This type of debt security has a coupon that decreases when interest rates increase, and vice versa. This type of derivative security is intended to eliminate exchange rate risk and involves counterparties that exchange the principal and interest payments of the loan in one currency for the equal discounted value of a counterparty's loan in another currency. This type of security is backed or collateralized by another debt security and may take the form of a zero coupon security or may receive periodic interest payments. Megabook Publications Inc. (MPI) is an American firm that has issued $50 million of US dollar-denominated bonds to fund a project in Italy. Its bankers have found a company in Italy that has issued $50 million of euro-denominated bonds to finance a project in the United States. Which of the following derivatives transactions would help both companies eliminate their exposures to exchange rate risk? O Structured note Interest rate swap Inverse floater Currency swap them to create a series of zero coupon Investment banks will purchase large blocks of 30-year noncallable Treasury bonds and then bonds
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