If Japanese Yen Floating Rates Are Well Below US Dollar

question 19

Multiple Choice

If Japanese yen floating rates are well below US dollar floating rates, then a fairly-priced basis swap that exchanges Japanese floating rates (plus a spread) for US floating rates must have

• A) a positive spread to compensate for the lower Japanese interest rates.
• B) a negative spread to compensate for the likely appreciation of the yen against the dollar.
• C) zero spread.
• D) Any of the three are possible.

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Definitions:

Total Revenue

The gross income a corporation achieves by trading products or delivering services across a certain span of time.

Elastic Demand

A situation in which the demand for a product is sensitive to price changes, meaning a small change in price leads to a larger change in quantity demanded.

Price Elasticity

An indicator that measures the impact on the quantity of a good demanded when there is a change in its price level.

Midpoint Method

A technique used to calculate elasticity by averaging the two points on a demand or supply curve and considering the percentage change from the average.