Question 1
Your firm is a U.K.-based exporter of British bicycles. You have sold an order
to an American firm for $1,000,000 worth of bicycles. Payment from the
American firm (in U.S. dollars) is due in six months. Detail a strategy using
forward contracts that will hedge your exchange rate risk.
Selected
Answer:
Go long 8 six-month forward contracts; raise
approximately £537,600.
Correct
Answer:
Go long 8 six-month forward contracts; raise
approximately £537,600.
Response
Feedback: Module 2 slide 78. We need to sell dollars which we will get in 6
months from today (ie) buy pounds (1,000,000/1.86 = 537,600
pounds approx) at 1.86$. This is 537600/62,500 = 8.60 (approx
8) contracts.
Question 2
Your firm is a U.K.-based exporter of bicycles. You have sold an order to a
Swiss firm for SFr. 1,000,000 worth of bicycles. Payment from the Swiss firm
(in Swiss francs) is due in 12 months. Detail a strategy using forward
contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and maturity.
Selected
Answer:
Go short 100 12-month Swiss franc forward contracts; and long
50 12-month pound forward contracts.
Correct
Answer:
Go short 100 12-month Swiss franc forward contracts; and long
50 12-month pound forward contracts.
Response
Feedback
:
Module 2 slide 78. Since there is no contract available between
SFR and Pounds we must use the $ contracts. We need to sell SFR
which we will get in 12 months from today (1,000,000/10,000 =
100 contracts) at 1$. We get 1 million $ and use this to buy
pounds forward at 2$ = 500,000 pounds. This is 500000/10000 =
50 contracts.
Question 3
1 out of 1 points
Your firm is an Italian importer of bicycles. You have placed an order with a
Swiss firm for SFr. 2,000,000 worth of bicycles. Payment (in francs) is due
in 12 months. Detail a strategy using forward contracts that will hedge
your exchange rate risk. Have an estimate of how many contracts of what
type and maturity.
Selected
Answer:
Go long 200 12-month Swiss franc forward contracts; and
short 125 12-month euro forward contracts.
Correct
Answer:
Go long 200 12-month Swiss franc forward contracts; and
short 125 12-month euro forward contracts.
Response
Feedback
:
Module 2 slide 76. Since there is no contract available between
Euros and SFR we must use the $ contracts. We need to buy SFR
which we will need in 12 months from today (2,000,000/10,000
= 200 contracts) at 1$. We will need 2 million $ and get this by
selling euros forward at 1.6$ = 1.25 million euros. This is
1250000/10000 = 125 contracts.
Question 4
0 out of 1 points
Your firm is a Swiss importer of bicycles. You have placed an order with a
British firm for £1,000,000 worth of bicycles. Payment (in pounds sterling)
is due in 12 months. Detail a strategy using forward contracts that will
hedge your exchange rate risk. Have an estimate of how many contracts
of what type and maturity.
Selected
Answer:
Go short 100 12-month pound forward contracts; and long 200
12-month SFr. forward contracts.
Correct
Answer:
Go long 100 12-month pound forward contracts; and short 200
12-month SFr. forward contracts.
Response
Feedback
:
Module 2 slide 76. Since there is no contract available between
SFR and Pounds we must use the $ contracts. We need to buy
pounds which we will pay in 12 months from today
(1,000,000/10,000 = 100 contracts) at 2$. We need 2,000,000$
and get this by selling SFR forward at 1$ = 2 million SFR. This is
2 million SFR/10,000 = 200 contracts.
Question 5
1 out of 1 points
Your firm is a Swiss exporter of bicycles. You have sold an order to a
French firm for €1,000,000 worth of bicycles. Payment from the French
firm (in euro) is due in 12 months. Detail a strategy using forward
contracts that will hedge your exchange rate risk. Have an estimate of
how many contracts of what type and maturity.
Selected
Answer:
Go short 100 12-month euro forward contracts; and long 160
12-month Swiss Franc forward contracts.
Correct
Answer:
Go short 100 12-month euro forward contracts; and long 160
12-month Swiss Franc forward contracts.
Response
Feedback
:
Module 2 slide 78. Since there is no contract available between
SFR and Euro we must use the $ contracts. We need to sell euros
which we will get in 12 months from today (1,000,000/10,000 =
100 contracts) at 1.6$. We get 1,600,000$ and use this to buy
SFR forward at 1$ = 1.6 million SFR. This is 1.6 million
SFR/10,000 = 160 contracts.
Question 6
1 out of 1 points
Your firm is an Italian exporter of bicycles. You have sold an order to a
British firm for £1,000,000 worth of bicycles. Payment from the customer
(in pounds sterling) is due in 12 months. Detail a strategy using forward
contracts that will hedge your exchange rate risk. Have an estimate of
how many contracts of what type and maturity.
Selected
Answer:
Go short 100 12-month pound forward contracts; and long 125
12-month euro forward contracts.
Correct
Answer:
Go short 100 12-month pound forward contracts; and long 125
12-month euro forward contracts.
Response
Feedback
:
Module 2 slide 78. Since there is no contract available between
Euro and Pounds we must use the $ contracts. We need to sell
Pounds which we will get in 12 months from today
(1,000,000/10,000 = 100 contracts) at 2$. We get 2 million $
and use this to buy euros forward at 1.6$ = 1.25 million euros.
This is 1.25 million/10000 = 125 contracts.
Question 7
0 out of 1 points
The current spot exchange rate is $1.50/€ and the three-month forward rate is
$1.55/€. Based on your analysis of the exchange rate, you are confident that the
spot exchange rate will be $1.62/€ in three months. Assume that you would like
to buy or sell €1,000,000. What actions do you need to take to speculate in the
forward market? What is the expected dollar profit from speculation?
Selected
Answer:
Buy €1,000,000 today at $1.50/€; wait three months, if your
forecast is correct sell €1,000,000 at $1.62/€.
Correct
Answer:
Buy €1,000,000 forward for $1.55/€.
Response
Feedback:
Module 2 slide 83. Buy Euro Forward since you canget it for 1.55$
when you are sure it will be 1.62$ – So Long forward contract on
Euro
Question 8
1 out of 1 points
The current spot exchange rate is $1.55/€ and the three-month forward rate is
$1.50/€. Based on your analysis of the exchange rate, you are confident that the
spot exchange rate will be $1.62/€ in three months. Assume that you would like
to buy or sell €1,000,000. What actions do you need to take to speculate in the
forward market? What is the expected dollar profit from speculation?
