1. An American firm is earning British pounds from its foreign subsidiary. A British firm is earning dollars from its USA subsidiary. Neither firm can borrow at a cost effective rate outside of its home country/currency. What kind of swap could be used to limit the ForEx risk of both firms and explain the payment flows involved? Give details
2. Describe an agency transaction (brokerage) and a principle transaction (dealer) that is involved in trading. What determines profits in each activity? Which is riskier?
3. A thrift has a negative annual CGAP of $35 million. A credit union has an annual CGAP of +$8 million. The thrift has total assets of $500 million and the credit union has total assets of $40 million. Assuming a zero spread effect, if all interest rates decrease 35 basis points, what is the change in NII for the thrift? For the credit union?