International Financial Management, 8e (Eun)
Chapter 8 Management of Transaction Exposure
1) Transaction exposure is defined as
A) the sensitivity of realized domestic currency values of the firm’s contractual cash flows
denominated in foreign currencies to unexpected exchange rate changes.
B) the extent to which the value of the firm would be affected by unanticipated changes in
exchange rate.
C) the potential that the firm’s consolidated financial statement can be affected by changes in
exchange rates.
D) ex post and ex ante currency exposures.
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Copyright © 2018 McGraw-Hill
5) If you own a foreign currency denominated bond, you can hedge with
A) a long position in a currency forward contract.
B) a long position in an exchange-traded futures option.
C) buying the foreign currency today and investing it in the foreign county.
D) a swap contract where pay the cash flows of the bond in exchange for dollars.
Answer: D
Topic: Three Types of Exposure
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6) The sensitivity of “realized” domestic currency values of the firm’s contractual cash flows
denominated in foreign currency to unexpected changes in the exchange rate is
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
Answer: A
Topic: Three Types of Exposure
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7) The sensitivity of the firm’s consolidated financial statements to unexpected changes in the
exchange rate is
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
Answer: B
Topic: Three Types of Exposure
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8) The extent to which the value of the firm would be affected by unexpected changes in the
exchange rate is
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
Answer: C
Topic: Three Types of Exposure
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Copyright © 2018 McGraw-Hill
9) With any hedge,
A) your losses on one side should about equal your gains on the other side.
B) you should try to make money on both sides of the transaction; that way you make money
coming and going.
C) you should spend at least as much time working the hedge as working the underlying deal itself.
D) you should agree to anything your banker puts in front of your face.
Answer: A
Topic: Three Types of Exposure
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10) With any successful hedge,
A) you are guaranteed to lose money on one side.
B) you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
C) you are guaranteed to lose money on one side, but you can avoid the accounting ramifications
of a loss on one side by keeping it off the books.
D) none of the options
Answer: D
Topic: Three Types of Exposure
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11) The choice between a forward market hedge and a money market hedge often comes down to
A) interest rate parity.
B) option pricing.
C) flexibility and availability.
D) none of the options
Answer: A
Topic: Three Types of Exposure
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12) Since a corporation can hedge exchange rate exposure at low cost
A) there is no benefit to the shareholders in an efficient market.
B) shareholders would benefit from the risk reduction that hedging offers.
C) the corporation’s banker would benefit from the risk reduction that hedging offers.
D) none of the options
Answer: C
Topic: Three Types of Exposure
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Copyright © 2018 McGraw-Hill
13) A CFO should be least worried about
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
Answer: B
Topic: Three Types of Exposure
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14) Exchange rate risk of a foreign currency payable is an example of
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
Answer: A
Topic: Three Types of Exposure
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15) A stock market investor would pay attention to
A) anticipated changes in exchange rates that have been already discounted and reflected in the
firm’s value.
B) unanticipated changes in exchange rates that have not been discounted and reflected in the
firm’s value.
C) anticipated changes in exchange rates that have been already discounted and reflected in the
firm’s value, as well as unanticipated changes in exchange rates that have not been discounted and
reflected in the firm’s value.
D) none of the options
Answer: A
Topic: Three Types of Exposure
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Copyright © 2018 McGraw-Hill
16) Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million
payable in one year. The money market interest rates and foreign exchange rates are given as
follows:
The U.S. one-year interest rate:
6.10
% per annum
The euro zone one-year interest rate:
9.00
% per annum
The spot exchange rate:
$
1.50
/€
The one-year forward exchange rate
$
1.46
/€
Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in
exchange for a predetermined amount of U.S. dollars. Which of the following is/are true? On the
maturity date of the contract Boeing will
(i) have to deliver €10 million to the bank (the counter party of the forward contract).
(ii) take delivery of $14.6 million
(iii) have a zero net euro exposure
(iv) have a profit, or a loss, depending on the future changes in the exchange rate, from this British
sale.
A) (i) and (iv)
B) (ii) and (iv)
C) (ii), (iii), and (iv)
D) (i), (ii), and (iii)
Answer: D
Explanation: $14.6 million = $1.46 × €10,000,000. Additionally, the net euro exposure is zero
because the euro receivable offsets the euro payable.
Topic: Forward Market Hedge
6
Copyright © 2018 McGraw-Hill
17) Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million
payable in one year. The money market interest rates and foreign exchange rates are given as
follows:
The U.S. one-year interest rate:
6.10
% per annum
The euro zone one-year interest rate:
9.00
% per annum
The spot exchange rate:
$
1.50
/€
The one-year forward exchange rate
$
1.46
/€
Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in
exchange for a predetermined amount of U.S. dollars. Suppose that on the maturity date of the
forward contract, the spot rate turns out to be $1.40/€ (i.e. less than the forward rate of $1.46/€).
Which of the following is true?
A) Boeing would have received only $14.0 million, rather than $14.6 million, had it not entered
into the forward contract.
B) Boeing gained $0.6 million from forward hedging.
C) Boeing would have received only $14.0 million, rather than $14.6 million, had it not entered
into the forward contract. Additionally, Boeing gained $0.6 million from forward hedging.
D) none of the options
Answer: C
Explanation: $14,000,000 = $1.40 × €10,000,000 and $14,600,000 = $1.46 × €10,000,000. Gain
= (F − ST) × €10,000,000 = ($1.46 − $1.40) × €10,000,000 = $600,000, or $0.6 million.
Topic: Forward Market Hedge
7
Copyright © 2018 McGraw-Hill
18) Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an Italian
firm for €1,000,000 worth of bicycles. Payment from the Italian firm (in €) is due in twelve
months. Your firm wants to hedge the receivable into pounds. Not dollars. Use the following table
for exchange rate data.
Country
U.S.S equiv.
Currency per U.S.$
Tuesday
Tuesday
Monday
Britain(pound)£62,500
1.6000
0.625
0.6211
1 Month Forward
1.6100
0.6211
0.6173
3 Months Forward
1.6300
0.6173
0.6024
6 Months Forward
1.6600
0.6024
0.5814
12 Months Forward
1.7200
0.5814
0.5556
Euro €62,500
1.2000
0.833333
0.833333
1 Month Forward
1.2100
0.82645
0.82645
3 Months Forward
1.2300
0.813008
0.813008
6 Months Forward
1.2600
0.793651
0.793651
12 Months Forward
1.2900
0.775194
0.7575758
Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate
of how many contracts of what type.
A) Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable.
Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to pounds at spot,
receive £728,155.34.
B) Sell €1m forward using 16 contracts at $1.20 per €1. Buy £750,000 forward using 12 contracts
at $1.60 per £1.
C) Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.
D) Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1. Buy £750,000 forward
using 12 contracts at the forward rate of $1.72 per £1.
Answer: D
Topic: Forward Market Hedge
19) A Japanese exporter has a €1,000,000 receivable due in one year. Spot and forward exchange
rate data is given:
Spot exchange rates
1-year Forward Rates
Contract size
$
1.20
=
€
1.00
$
1.25
=
€
1.00
€
62,500
$
1.00
=
¥
100
$
1.00
=
¥
120
¥
12,500,000
The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using
forward contracts
A) Borrow €970,873.79 today; in one year you owe €1m, which will be financed with the
receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to yen
at spot, receive ¥116,504,854.
B) Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1. Buy ¥150,000,000
forward using 11.52 contracts, at the forward rate of $1.00 = ¥120.
C) Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1. Buy ¥150,000,000
forward using 12 contracts, at the forward rate of $1.00 = ¥120.
D) none of the options
10
24) Your firm is a U.K.-based 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 futures contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and maturity.
U.S. $ equiv.
Currency per U.S. $
Contract Size
Country
Tuesday
Monday
Tuesday
Monday
£
10,000
Britain
(pound)
$
1.9600
$
1.9400
£
0.5102
£
0.5155
1 month
forward
$
1.9700
$
1.9500
£
0.5076
£
0.5128
3 months
forward
$
1.9800
$
1.9600
£
0.5051
£
0.5102
6 months
forward
$
1.9900
$
1.9700
£
0.5025
£
0.5076
12
months
forward
$
2.0000
$
1.9800
£
0.5000
£
0.5051
€
10,000
Euro
$
1.5600
$
1.5400
€
0.6410
€
0.6494
1 month
forward
$
1.5700
$
1.5500
€
0.6369
€
0.6452
3 months
forward
$
1.5800
$
1.5600
€
0.6329
€
0.6410
6 months
forward
$
1.5900
$
1.5700
€
0.6289
€
0.6369
12
months
forward
$
1.6000
$
1.5800
€
0.6250
€
0.6329
SFr.
10,000
Swiss
franc
$
0.9200
$
0.9000
SFr.
1.0870
SFr
.
1.1111
1 month
forward
$
0.9400
$
0.9200
SFr.
1.0638
SFr
.
1.0870
3 months
forward
$
0.9600
$
0.9400
SFr.
1.0417
SFr
.
1.0638
6 months
forward
$
0.9800
$
0.9600
SFr.
1.0204
SFr
.
1.0417
12
months
forward
$
1.0000
$
0.9800
SFr.
1.0000
SFr
.
1.0204
A) Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
B) Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
C) Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
D) Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
E) none of the options
11
Copyright © 2018 McGraw-Hill
Answer: D
Explanation: 100 contracts = €1,000,000 / €10,000; $1,600,000 = €1,000,000 × $1.60; Solve the
proportion for X: ($1,600,000 / X) = ($2 / £1), where X = £800,000. Next, £800,000 / £10,000 = 80
contracts.
Topic: Forward Market Hedge
12
25) Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm
for €1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Detail a strategy using
futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts
of what type and maturity.
U.S. $ equiv.
Currency per U.S. $
Contract Size
Country
Tuesday
Monday
Tuesday
Monday
£
10,000
Britain
(pound)
$
1.9600
$
1.9400
£
0.5102
£
0.5155
1 month
forward
$
1.9700
$
1.9500
£
0.5076
£
0.5128
3 months
forward
$
1.9800
$
1.9600
£
0.5051
£
0.5102
6 months
forward
$
1.9900
$
1.9700
£
0.5025
£
0.5076
12
months
forward
$
2.0000
$
1.9800
£
0.5000
£
0.5051
€
10,000
Euro
$
1.5600
$
1.5400
€
0.6410
€
0.6494
1 month
forward
$
1.5700
$
1.5500
€
0.6369
€
0.6452
3 months
forward
$
1.5800
$
1.5600
€
0.6329
€
0.6410
6 months
forward
$
1.5900
$
1.5700
€
0.6289
€
0.6369
12
months
forward
$
1.6000
$
1.5800
€
0.6250
€
0.6329
SFr.
10,000
Swiss
franc
$
0.9200
$
0.9000
SFr.
1.0870
SFr
.
1.1111
1 month
forward
$
0.9400
$
0.9200
SFr.
1.0638
SFr
.
1.0870
3 months
forward
$
0.9600
$
0.9400
SFr.
1.0417
SFr
.
1.0638
6 months
forward
$
0.9800
$
0.9600
SFr.
1.0204
SFr
.
1.0417
12
months
forward
$
1.0000
$
0.9800
SFr.
1.0000
SFr
.
1.0204
A) Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
B) Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
C) Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
D) Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
E) none of the options
13
Copyright © 2018 McGraw-Hill
Answer: C
Explanation: 100 contracts = €1,000,000 / €10,000; $1,600,000 = €1,000,000 × $1.60; Solve the
proportion for X: ($1,600,000 / X) = ($2 / £1), where X = £800,000. Next, £800,000 / £10,000 = 80
contracts.
Topic: Forward Market Hedge
14
26) 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 futures contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and maturity.
U.S. $ equiv.
Currency per U.S. $
Contract Size
Country
Tuesday
Monday
Tuesday
Monday
£
10,000
Britain
(pound)
$
1.9600
$
1.9400
£
0.5102
£
0.5155
1 month
forward
$
1.9700
$
1.9500
£
0.5076
£
0.5128
3 months
forward
$
1.9800
$
1.9600
£
0.5051
£
0.5102
6 months
forward
$
1.9900
$
1.9700
£
0.5025
£
0.5076
12
months
forward
$
2.0000
$
1.9800
£
0.5000
£
0.5051
€
10,000
Euro
$
1.5600
$
1.5400
€
0.6410
€
0.6494
1 month
forward
$
1.5700
$
1.5500
€
0.6369
€
0.6452
3 months
forward
$
1.5800
$
1.5600
€
0.6329
€
0.6410
6 months
forward
$
1.5900
$
1.5700
€
0.6289
€
0.6369
12
months
forward
$
1.6000
$
1.5800
€
0.6250
€
0.6329
SFr.
10,000
Swiss
franc
$
0.9200
$
0.9000
SFr.
1.0870
SFr
.
1.1111
1 month
forward
$
0.9400
$
0.9200
SFr.
1.0638
SFr
.
1.0870
3 months
forward
$
0.9600
$
0.9400
SFr.
1.0417
SFr
.
1.0638
6 months
forward
$
0.9800
$
0.9600
SFr.
1.0204
SFr
.
1.0417
12
months
forward
$
1.0000
$
0.9800
SFr.
1.0000
SFr
.
1.0204
A) Go short 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures
contracts.
B) Go long 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures
contracts.
C) Go long 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures
contracts.
D) Go short 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures
contracts.
E) none of the options
16
27) Your firm is a Swiss importer of bicycles. You have placed an order with an Italian firm for
€1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Detail a strategy using
futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts
of what type and maturity.
U.S. $ equiv.
Currency per U.S. $
Contract Size
Country
Tuesday
Monday
Tuesday
Monday
£
10,000
Britain
(pound)
$
1.9600
$
1.9400
£
0.5102
£
0.5155
1 month
forward
$
1.9700
$
1.9500
£
0.5076
£
0.5128
3 months
forward
$
1.9800
$
1.9600
£
0.5051
£
0.5102
6 months
forward
$
1.9900
$
1.9700
£
0.5025
£
0.5076
12
months
forward
$
2.0000
$
1.9800
£
0.5000
£
0.5051
€
10,000
Euro
$
1.5600
$
1.5400
€
0.6410
€
0.6494
1 month
forward
$
1.5700
$
1.5500
€
0.6369
€
0.6452
3 months
forward
$
1.5800
$
1.5600
€
0.6329
€
0.6410
6 months
forward
$
1.5900
$
1.5700
€
0.6289
€
0.6369
12
months
forward
$
1.6000
$
1.5800
€
0.6250
€
0.6329
SFr.
10,000
Swiss
franc
$
0.9200
$
0.9000
SFr.
1.0870
SFr
.
1.1111
1 month
forward
$
0.9400
$
0.9200
SFr.
1.0638
SFr
.
1.0870
3 months
forward
$
0.9600
$
0.9400
SFr.
1.0417
SFr
.
1.0638
6 months
forward
$
0.9800
$
0.9600
SFr.
1.0204
SFr
.
1.0417
12
months
forward
$
1.0000
$
0.9800
SFr.
1.0000
SFr
.
1.0204
A) Go short 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures
contracts.
B) Go long 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures
contracts.
C) Go long 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures
contracts.
D) Go short 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures
contracts.
E) none of the options
18
28) 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 futures contracts that will hedge your exchange rate risk. Have an estimate
of how many contracts of what type and maturity.
U.S. $ equiv.
Currency per U.S. $
Contract Size
Country
Tuesday
Monday
Tuesday
Monday
£
10,000
Britain
(pound)
$
1.9600
$
1.9400
£
0.5102
£
0.5155
1 month
forward
$
1.9700
$
1.9500
£
0.5076
£
0.5128
3 months
forward
$
1.9800
$
1.9600
£
0.5051
£
0.5102
6 months
forward
$
1.9900
$
1.9700
£
0.5025
£
0.5076
12
months
forward
$
2.0000
$
1.9800
£
0.5000
£
0.5051
€
10,000
Euro
$
1.5600
$
1.5400
€
0.6410
€
0.6494
1 month
forward
$
1.5700
$
1.5500
€
0.6369
€
0.6452
3 months
forward
$
1.5800
$
1.5600
€
0.6329
€
0.6410
6 months
forward
$
1.5900
$
1.5700
€
0.6289
€
0.6369
12
months
forward
$
1.6000
$
1.5800
€
0.6250
€
0.6329
SFr.
10,000
Swiss
franc
$
0.9200
$
0.9000
SFr.
1.0870
SFr
.
1.1111
1 month
forward
$
0.9400
$
0.9200
SFr.
1.0638
SFr
.
1.0870
3 months
forward
$
0.9600
$
0.9400
SFr.
1.0417
SFr
.
1.0638
6 months
forward
$
0.9800
$
0.9600
SFr.
1.0204
SFr
.
1.0417
12
months
forward
$
1.0000
$
0.9800
SFr.
1.0000
SFr
.
1.0204
A) Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.
B) Go short 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.
C) Go long 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.
D) Go short 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.
E) none of the options
19
Copyright © 2018 McGraw-Hill
Answer: D
Explanation: 100 contracts = £1,000,000 / £10,000; $2,000,000 = £1,000,000 × $2; Solve the
proportion for X: ($2,000,000 / X) = ($1.60 / €1), where X = €1,250,000. Next, €1,250,000 /
€10,000 = 125 contracts.
Topic: Forward Market Hedge
29) Your firm is an Italian 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 futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.
U.S. $ equiv.
Currency per U.S. $
Contract Size
Country
Tuesday
Monday
Tuesday
Monday
£
10,000
Britain
(pound)
$
1.9600
$
1.9400
£
0.5102
£
0.5155
1 month
forward
$
1.9700
$
1.9500
£
0.5076
£
0.5128
3 months
forward
$
1.9800
$
1.9600
£
0.5051
£
0.5102
6 months
forward
$
1.9900
$
1.9700
£
0.5025
£
0.5076
12
months
forward
$
2.0000
$
1.9800
£
0.5000
£
0.5051
€
10,000
Euro
$
1.5600
$
1.5400
€
0.6410
€
0.6494
1 month
forward
$
1.5700
$
1.5500
€
0.6369
€
0.6452
3 months
forward
$
1.5800
$
1.5600
€
0.6329
€
0.6410
6 months
forward
$
1.5900
$
1.5700
€
0.6289
€
0.6369
12
months
forward
$
1.6000
$
1.5800
€
0.6250
€
0.6329
SFr.
10,000
Swiss
franc
$
0.9200
$
0.9000
SFr.
1.0870
SFr
.
1.1111
1 month
forward
$
0.9400
$
0.9200
SFr.
1.0638
SFr
.
1.0870
3 months
forward
$
0.9600
$
0.9400
SFr.
1.0417
SFr
.
1.0638
6 months
forward
$
0.9800
$
0.9600
SFr.
1.0204
SFr
.
1.0417
12
months
forward
$
1.0000
$
0.9800
SFr.
1.0000
SFr
.
1.0204