Part I.

Discuss the statement - bond duration decreases as the yield to maturity increases, and vice versa.

Part II.

Discuss why the seller of a long FRA benefits if the underlying interest rate decreases.

Part III.

In layman's terms, explain what a 12 x 15 FRA means.

Part IV.

You are the holder of a long FRA on 90-day LIBOR with a fixed rate of 4.75 percent and a notional amount of $20 million. If the underlying LIBOR is 5 percent at expiration, what is the dollar profit or loss on this FRA? (Assuming a 360-day year.)

Part V.

Discuss how a firm can use a credit spread put option to manage its credit risk.

Part VI.

Assume the USDAUD exchange rate is quoted as 1 USD = 1.2000 AUD. The 180 day forward rate is quoted at 1.2040. (use 360 days per year). If the USD interest rate is 1% p.a., will the AUD interest rate be higher or lower? Explain.