Question13 Singapore Airlines Ltd has decided to enter into an agreement to exchange foreign currencies in the future at an exchange rate determined today. This transaction will be conducted in the over-the-counter market. Singapore Airlines Ltd has entered into a _____________________ with a counterparty. futures contract written on foreign currency cross-currency swap currency options contract forward foreign exchange contract foreign exchange transaction in the spot market ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

The question describes an agreement to exchange foreign currencies in the future at a rate determined today, and it specifies that the transaction will be conducted in the over-the-counter market. Now, let's evaluate each option in turn to see which best fits this scenario.

Option 1: futures contract written on foreign currency. Futures contracts are typically standardized and traded on organized exchanges, not over-the-counter (OTC). Since the question explicitly states the transaction will be OTC, this option is inconsistent with the given context. Additionally, futures are marked to market daily and involve standardized terms, which contrasts with a custom OTC agreement.

Option 2: cross-currency swap. A cross-currency swap involves exchanging principal and interest payments in two different currencies over a period of time, usually based on a notional amount and governed by a contractual schedule. It is more complex and longer-term than a single forward-like exchange of currencies today for a future date, and it does not necessarily specify a single future exchange rate fixed today for a one-time future currency swap.

Option 3: currency options contract. A currency option gives the holder the right, but not the obligation, to exchange currencies at a specified rate on or before a specified date. It involves a premium and provides optionality rather than an obligation to transact at a rate fixed today for a future date. The scenario emphasizes an obligatory future exchange at today-determined rate, which is not what an option provides.

Option 4: forward foreign exchange contract. A forward FX contract is an OTC agreement to exchange a specified amount of one currency for another at a predetermined rate on a specified future date. This perfectly matches the description: an OTC arrangement to lock in an exchange rate today for a future currency exchange.

Option 5: foreign exchange transaction in the spot market. A spot FX transaction involves an immediate exchange of currencies at the current spot rate, typically settled within two business days. Since the question involves a future exchange at a rate determined today, the spot market transaction does not fit.

In summary, the description aligns with a customized, over-the-counter agreement to exchange currencies in the future at a rate fixed today, which is characteristic of a forward foreign exchange contract. The other options either describe standardized traded instruments (futures), more complex or optional arrangements (cross-currency swaps, currency options), or immediate settlement (spot), none of which match the scenario as closely as a forward contract. Each incorrect choice fails for reasons related to OTC status, obligations vs. optionality, or timing of settlement.

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