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Financial Risk Manager Part 1

Financial Risk Manager Part 1

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A hedge fund's currency derivatives expert is providing an in-depth explanation of currency swaps to a group of junior analysts. To illustrate the concept, they use a fixed-for-fixed currency swap between the US dollar (USD) and the Chinese yuan (CNY) with the following specific terms:

  • Notional amount in USD: USD 10 million
  • Notional amount in CNY: CNY 65 million
  • Interest rate in USD: 1.0%
  • Interest rate in CNY: 2.5%
  • Time to maturity: 4 years
  • Frequency of interest payments: Annual

Given that the hedge fund will be receiving interest payments in CNY, which of the following conclusions would the analysts most likely find accurate?

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