Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
44) Your firm is a Swiss exporter of bicycles. You have sold an order to a British firm for
£1,000,000 worth of bicycles. Payment from the British firm (in pounds sterling) is due in 12
months. Use a money market hedge to redenominate this one-year receivable into a
euro-denominated receivable with a one-year maturity.
Contract Size
Country
U.S. $ equiv.
Currency per
U.S. $
£
10,000
Britain
(pound)
$
1.9600
£
0.5102
interest
APR
12 months
forward
$
2.0000
£
0.5000
rates
€
10,000
Euro
$
1.5600
€
0.6410
i$
=
1
%
12 months
forward
$
1.6000
€
0.6250
i€
=
2
%
SFr.
10,000
Swiss
franc
$
0.9200
SFr.
1.0870
i£
=
3
%
12 months
forward
$
1.0000
SFr.
1.0000
iSFr.
=
4
%
The following were computed without rounding. Select the answer closest to yours.
A) SFr. 2,000,000
B) SFr. 2,151,118.62
C) SFr. 2,068,383.28
D) SFr. 1,921,941.75
45) 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. Use a money
market hedge to redenominate this one-year pound denominated payable into a Swiss
franc-denominated payable with a one-year maturity.
Contract Size
Country
U.S. $ equiv.
Currency per
U.S. $
£
10,000
Britain
(pound)
$
1.9600
£
0.5102
interest
APR
12 months
forward
$
2.0000
£
0.5000
rates
€
10,000
Euro
$
1.5600
€
0.6410
i$
=
1
%
12 months
forward
$
1.6000
€
0.6250
i€
=
2
%
SFr.
10,000
Swiss
franc
$
0.9200
SFr.
1.0870
i£
=
3
%
12 months
forward
$
1.0000
SFr.
1.0000
iSFr.
=
4
%
The following were computed without rounding. Select the answer closest to yours.
A) SFr. 2,000,000
B) SFr. 2,151,118.62
C) SFr. 2,068,383.28
D) SFr. 1,921,941.75
46) Your firm is an Italian exporter of bicycles. You have sold an order to a Swiss firm for SFr.
2,000,000 worth of bicycles. Payment from the customer (in Swiss francs) is due in 12 months.
Use a money market hedge to redenominate this one-year franc denominated receivable into a
euro-denominated receivable with a one-year maturity.
Contract Size
Country
U.S. $ equiv.
Currency per
U.S. $
£
10,000
Britain
(pound)
$
1.9600
£
0.5102
interest
APR
12 months
forward
$
2.0000
£
0.5000
rates
€
10,000
Euro
$
1.5600
€
0.6410
i$
=
1
%
12 months
forward
$
1.6000
€
0.6250
i€
=
2
%
SFr.
10,000
Swiss
franc
$
0.9200
SFr.
1.0870
i£
=
3
%
12 months
forward
$
1.0000
SFr.
1.0000
iSFr.
=
4
%
The following were computed without rounding. Select the answer closest to yours.
A) €1,116,826.92
B) €1,250,000
C) €1,134,122.29
D) €1,156,804.73
47) 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. Use a money market
hedge to redenominate this one-year franc denominated payable into a euro-denominated payable
with a one-year maturity.
Contract Size
Country
U.S. $ equiv.
Currency per
U.S. $
£
10,000
Britain
(pound)
$
1.9600
£
0.5102
interest
APR
12 months
forward
$
2.0000
£
0.5000
rates
€
10,000
Euro
$
1.5600
€
0.6410
i$
=
1
%
12 months
forward
$
1.6000
€
0.6250
i€
=
2
%
SFr.
10,000
Swiss
franc
$
0.9200
SFr.
1.0870
i£
=
3
%
12 months
forward
$
1.0000
SFr.
1.0000
iSFr.
=
4
%
The following were computed without rounding. Select the answer closest to yours.
A) €1,116,826.92
B) €1,250,000
C) €1,134,122.29
D) €1,156,804.73
48) From the perspective of a corporate CFO, when hedging a payable versus a receivable
A) credit risk considerations are more germane for a payable.
B) credit risk considerations are more germane for a receivable.
C) none of the options
49) 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. Interest rates are 3
percent in €, 2 percent in $ and 4 percent in £.
Country
U.S.$ equiv.
Currency per U.S.$
Tuesday
Monday
Tuesday
Monday
Britain(pound)£62,500
1.6000
1.6100
0.625
0.6211
1 Month Forward
1.6100
1.6300
0.6211
0.6173
3 Months Forward
1.6300
1.6600
0.6173
0.6024
6 Months Forward
1.6600
1.7200
0.6024
0.5814
12 Months Forward
1.7200
1.8000
0.5814
0.5556
Euro €62,500
1.2000
1.2000
0.833333
0.833333
1 Month Forward
1.2100
1.2100
0.82645
0.82645
3 Months Forward
1.2300
1.2300
0.813008
0.813008
6 Months Forward
1.2600
1.2600
0.793651
0.793651
12 Months Forward
1.2900
1.3200
0.775194
0.757575
Detail a strategy using spot exchange rates and borrowing or lending that will hedge your
exchange rate risk.
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. Buy £750,000 forward
using 12 contracts at the forward rate of $1.72 per £1.
D) none of the options
50) A Japanese exporter has a €1,000,000 receivable due in one year. Detail a strategy using a
money market hedge that will eliminate any exchange rate risk.
1-year rates of interest
Borrowing
Lending
Dollar
4.5
%
4.00
%
Euro
6.00
%
5.25
%
Yen
1.00
%
0.75
%
Spot exchange rates
1-year Forward Rates
$
1.25
=
€
1.00
$
1.2262
=
€
1.00
$
1.00
=
¥
100
$
1.03
=
¥
100
A) Borrow €970,873.79 today. Convert the euro to dollars at the spot exchange rate, receive
$1,165,048.54. Convert these dollars to yen at the spot rate, receive ¥.
B) Borrow €943,396.22 today. Convert the euro to dollars at the spot exchange rate, convert these
dollars to yen at the spot rate, receive ¥117,924,528.30.
C) Lend €943,396.22 today. Convert the euro to dollars at the spot exchange rate, convert these
dollars to yen at the spot rate.
D) Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate; lend
€943,396.22 at 5.25 percent.
51) A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the U.S. firm gets
paid. To hedge, the U.S. firm bought put options on the euro with a strike price of $1.65. They paid
an option premium $0.01 per euro. If at maturity, the exchange rate is $1.60,
A) the firm will realize $1,145,000 on the sale net of the cost of hedging.
B) the firm will realize $1,150,000 on the sale net of the cost of hedging.
C) the firm will realize $1,140,000 on the sale net of the cost of hedging.
D) none of the options
52) Buying a currency option provides
A) a flexible hedge against exchange exposure.
B) limits the downside risk while preserving the upside potential.
C) a right, but not an obligation, to buy or sell a currency.
D) all of the options
53) Which of the following options strategies are internally consistent?
A) Sell puts and buy calls.
B) Buy puts and sell calls.
C) Buy puts and buy calls.
D) Sell puts and buy calls, as well as buy puts and sell calls.
54) A Japanese exporter has a €1,000,000 receivable due in one year. Detail a strategy using
options that will eliminate exchange rate risk.
Listed Options
Strike
Puts
Calls
Euro€62,500
$
1.25
=
€
1.00
$
0.0075
per€
$
0.01
per€
Yen¥12,500,000
$
1.00
=
¥
100
$
0.0075
per¥100
0.01
per¥10
0
A) Buy 16 put options on euro, sell 10 call options on yen.
B) Buy 16 put options on euro, buy 10 call options on yen.
C) Sell 16 call options on euro, buy 10 put options on yen.
D) none of the options
55) A Japanese exporter has a €1,000,000 receivable due in one year. Estimate the cost today of an
options strategy that will eliminate exchange rate risk.
Listed Options
Strike
Puts
Calls
Euro€62,500
$
1.25
=
€
1.00
$
0.0075
per€
$
0.01
per€
Yen¥12,500,000
$
1.00
=
¥
100
$
0.0075
per¥100
0.01
per¥10
0
A) $20,000
B) $5,000
C) $12,500
D) none of the options
56) A Japanese importer has a $1,250,000 payable due in one year.
Spot exchange rates
1-year Forward Rates
Contract size
$
1.00
=
¥
100
$
1.00
=
¥
120
¥
12,500,000
Detail a strategy using forward contracts that will hedge his exchange rate risk.
A) Go short in 12 yen forward contracts.
B) Go long in 12 yen forward contracts.
C) Go short in 16 yen forward contracts.
D) none of the options
57) A Japanese importer has a €1,000,000 payable due in one year.
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 that will hedge his exchange rate risk. Have an estimate of how many contracts
of what type.
A) Go short in 12 yen forward contracts. Go long in 16 euro contracts.
B) Go long in 12 yen forward contracts. Go short in 16 euro contracts.
C) Go short in 16 yen forward contracts. Go long in 12 euro contracts.
D) none of the options
58) XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750
million payable in one year to a bank in Tokyo. Which of the following is not part of a money
market hedge?
A) Buy the ¥750 million at the forward exchange rate.
B) Find the present value of ¥750 million at the Japanese interest rate.
C) Buy that much yen at the spot exchange rate.
D) Invest in risk-free Japanese securities with the same maturity as the accounts payable
obligation.
59) XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750
million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one
year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the
United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per
yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this obligation using the
money market hedge is
A) $6,450,000.
B) $6,545,400.
C) $6,653,833.
D) $6,880,734.
60) XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750
million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one
year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the
United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per
yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this obligation using the
forward hedge is
A) $6,450,000.
B) $6,545,400.
C) $6,653,833.
D) $6,880,734.
61) To hedge a foreign currency payable,
A) buy call options on the foreign currency.
B) buy put options on the foreign currency.
C) sell call options on the foreign currency.
D) sell put options on the foreign currency.
62) To hedge a foreign currency receivable,
A) buy call options on the foreign currency with a strike in the domestic currency.
B) buy put options on the foreign currency with a strike in the domestic currency.
C) sell call options on the foreign currency with a strike in the domestic currency.
D) sell put options on the foreign currency with a strike in the domestic currency.
63) A call option on £1,000 with a strike price of €1,250 is equivalent to
A) a put option on €1,250 with an exercise price of €1,000.
B) a portfolio of options: a put on €1,250 with a strike price in dollars plus a call on £1,000 with a
strike price in dollars.
C) a put option on £1,000 with an exercise price of €1,250.
D) both a put option on €1,250 with an exercise price of €1,000 and a portfolio of options: a put on
€1,250 with a strike price in dollars plus a call on £1,000 with a strike price in dollars.
64) A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to
A) a put option to sell $18,000 at a strike price of $1.80 = £1.00.
B) a call option on $18,000 at a strike price of $1.80 = £1.00.
C) a put option on £10,000 at a strike price of $1.80 = £1.00.
D) none of the options
65) A put option to sell $18,000 at a strike price of $1.80 = £1.00 is equivalent to
A) a call option to buy £10,000 at a strike price of $1.80 = £1.00.
B) a call option on $18,000 at a strike price of $1.80 = £1.00.
C) a put option on £10,000 at a strike price of $1.80 = £1.00.
D) none of the options
66) XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750
million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one
year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the
United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per
yen for a premium of 0.012 cent per yen. Assume that the forward rate is the best predictor of the
future spot rate. The future dollar cost of meeting this obligation using the option hedge is
A) $6,450,000.
B) $6,545,400.
C) $6,653,833.
D) $6,880,734.
67) Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will
hedge your liability?
A) Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K. at i£.
B) Buy a call option on £100,000 with a strike price in dollars.
C) Take a long position in a forward contract on £100,000 with a 3-month maturity.
D) all of the options
68) Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will
hedge your liability?
A) Buy a call option on £100,000 with a strike price in euro.
B) Buy a put option on £100,000 with a strike price in dollars.
C) Buy a call option on £100,000 with a strike price in dollars.
D) none of the options
69) Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the
London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts)
are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For
a U.K. firm to hedge a €100,000 payable,
A) buy 10 call options on the euro with a strike in pounds sterling.
B) buy 8 put options on the pound with a strike in euro.
C) sell 10 call options on the euro with a strike in pounds sterling.
D) buy 10 call options on the euro with a strike in pounds sterling and buy 8 put options on the
pound with a strike in euro.
70) Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the
London exchange in units of €10,000 with strike prices of £0.80 = €1.00. Options (calls and puts)
are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For
a U.K. firm to hedge a €100,000 receivable,
A) buy 10 call options on the euro with a strike in pounds sterling.
B) buy 10 put options on the euro with a strike in pounds sterling.
C) buy 8 call options on the pound with a strike in euro.
D) buy 10 put options on the euro with a strike in pounds sterling and buy 8 call options on the
pound with a strike in euro.
71) Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the
Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00.Options (calls and
puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of
$2.00/£1.00. For a U.S. firm to hedge a €100,000 payable,
A) buy 10 call options on the euro with a strike in dollars.
B) buy 8 put options on the pound with a strike in dollars.
C) sell 10 call options on the euro with a strike in dollars.
D) sell 8 put options on the pound with a strike in dollars.
72) Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the
Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00.Options (calls and
puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of
$2.00/£1.00. For a U.S. firm to hedge a €100,000 receivable,
A) buy 10 call options on the euro with a strike in dollars.
B) buy 10 put options on the pound with a strike in dollars.
C) sell 10 call options on the euro with a strike in dollars.
D) sell 8 put options on the pound with a strike in dollars.
73) Suppose that $2 = £1, $1.60 = €1, and the cross-exchange rate is €1.25 = £1.00. If you own a
call option on £10,000 with a strike price of $1.50, you would exercise this option at maturity if
A) the $/£ exchange rate is at least $1.60/£.
B) the $/€ exchange rate is at least $1.60/€.
C) the €/£ exchange rate is at least €1.25/£.
D) none of the options
74) Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the
London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts)
are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For
an Italian firm to hedge a £100,000 payable,
A) buy 10 call options on the pound with a strike in euro.
B) buy 8 put options on the euro with a strike in pounds.
C) buying 10 call options on the pound with a strike in euro or buying 8 put options on the euro
with a strike in pounds will both work.
D) none of the options
75) Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the
London exchange in units of €10,000 with strike prices of £0.80 = €1.00. Options (calls and puts)
are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For
a French firm to hedge a £100,000 receivable,
A) buy 10 call options on the pound with a strike in euro.
B) buy 10 put options on the pound with a strike in euro.
C) buy 8 call options on the euro with a strike in pounds.
D) buy 10 put options on the pound with a strike in euro and buy 8 call options on the euro with a
strike in pounds.
76) A minor currency is
A) anything other than the "big six": U.S. dollar, British pound, Japanese yen, euro, Canadian
dollar, and Swiss franc.
B) any currency that trades at less than one U.S. dollar.
C) any currency that is less than a $20 denomination.
D) none of the options
77) A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with
A) forward contracts on the euro.
B) forward contracts on the ruble.
C) forward contracts on the pound.
D) forward contracts on the yen.
78) When cross-hedging,
A) try to find one asset that has a positive correlation with another asset.
B) the main thing is to find one asset that covaries with another asset in some predictable way.
C) try to find one asset that has a negative correlation with another asset.
D) none of the options
79) Your firm is bidding on a large construction contract in a foreign country. This contingent
exposure could best be hedged
A) with put options on the foreign currency.
B) with call options on the foreign currency.
C) both with put and call options on the foreign currency, depending upon the specifics ("the rest
of the story").
D) with futures contracts.
80) On a recent sale, Boeing allowed British Airways to pay either $18 million or £10 million.
A) At the due date, British airways will be indifferent between paying dollars or pounds since they
would of course have hedged their exposure either way.
B) Boeing has provided British Airways with a free option to buy $18 million with an exercise
price of £10 million.
C) Boeing has provided British Airways with a free option to sell up to £10 million with an
exercise price of $18 million.
D) all of the options
81) Contingent exposure can best be hedged with
A) options.
B) money market hedging.
C) futures.
D) all of the options
82) A 5-year swap contract can be viewed as a portfolio of 5 forward contracts with maturities of 1,
2, 3, 4 and 5 years. One important exception is that
A) the forward price is the same for the swap contract but not for the forward contracts.
B) the swap contract will have daily resettlement.
C) the forward contracts will have resettlement risk.
D) none of the options
83) To find the swap rate for a 3-year swap, you would
A) take the arithmetic average of the 1-, 2-, and 3-year forward rates.
B) take the geometric average of the 1-, 2-, and 3-year forward rates.
C) bootstrap the LIBOR yield curve.
D) none of the options
84) Generally speaking, a firm with recurrent exposure can best hedge using which product?
A) Options
B) Swaps
C) Futures
D) all of the options
85) The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the
choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500.
A) The seller has given the buyer an at-the-money put option.
B) The seller has given the buyer an at-the-money call option.
C) The seller has given the buyer both an at-the-money put option, as well as an at-the-money call
option.
D) none of the options
86) The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the
choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500.
A) The seller has given the buyer an at-the-money put option on euro with a strike in pounds.
B) The seller has given the buyer an at-the-money put option on pounds with a strike in euro.
C) The seller has given the buyer an at-the-money call option on euro with a strike in pounds.
D) none of the options
87) An exporter can shift exchange rate risk to their customers by
A) invoicing in their home currency.
B) invoicing in their customer's local currency.
C) splitting the difference, and invoicing half of sales in local currency and half of sales in home
currency.
D) invoicing sales in a currency basket such as the SDR as the invoice currency.
88) An exporter can share exchange rate risk with their customers by
A) invoicing in their customer's local currency.
B) splitting the difference, and invoicing half of sales in local currency and half of sales in home
currency.
C) invoicing sales in a currency basket such as the SDR as the invoice currency.
D) splitting the difference, and invoicing half of sales in local currency and half of sales in home
currency, as well as invoicing sales in a currency basket such as the SDR as the invoice currency.
89) An exporter faced with exposure to a depreciating currency can reduce transaction exposure
with a strategy of
A) paying or collecting early.
B) paying or collecting late.
C) paying late, collecting early.
D) paying early, collecting late.
90) An exporter faced with exposure to an appreciating currency can reduce transaction exposure
with a strategy of
A) paying or collecting early.
B) paying or collecting late.
C) paying late, collecting early.
D) paying early, collecting late.
91) An MNC seeking to reduce transaction exposure with a strategy of leading and lagging
A) can probably employ the strategy more effectively with intra firm payables and receivables
than with customers or outside suppliers.
B) can employ the strategy most easily with customers, regardless of market structure.
C) can employ the strategy most easily with suppliers, regardless of market structure.
D) none of the options
92) A financial subsidiary used for centralizing exposure management functions is also referred to
as a(an)
A) invoice center
B) reinvoice center
C) affiliate
D) none of the options
93) In evaluating the pros and cons of corporate risk management, one argument against hedging
is
A) if the corporate guys were good at forecasting exchange rates, they would make more money on
Wall Street, so only incompetent managers are left at corporations to hedge.
B) shareholders who are diversified have already managed their exchange rate risk.
C) the hedging costs go into someone else's pocket.
D) none of the options
94) If a firm faces progressive tax rates,
A) they should spread income out across time and subsidiaries.
B) they should focus on maximizing income in one division or subsidiary.
C) they should manage their income recognition without regard to their taxes.
D) none of the options
95) In evaluating the pros and cons of corporate risk management, "market imperfections" refer to
A) information asymmetry, differential transaction costs, default costs, and progressive corporate
taxes.
B) leading and lagging, receivables and payables, and diversification costs.
C) economic costs, noneconomic costs, arbitrage costs, and hedging costs.
D) management costs, corporate costs, liquidity costs, and trading costs.
96) ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10
million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or
depreciating. Calculate the expected tax of ABC if it is operating in a foreign country that has
progressive corporate taxes as shown. Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.
A) $3,375,000
B) $6,000,000
C) $1,500,000
D) $4,500,000
97) ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10
million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or
depreciating. Step one: calculate the expected tax of ABC if it is operating in a foreign country that
has progressive corporate taxes as shown.
Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.
Step two: ABC is considering implementing a hedging program that will eliminate their exchange
rate risk: they will make a certain $15 million whether or not the dollar appreciates or depreciates.
How much will they save in taxes if they implement the program?
A) $0
B) $3,375,000
C) $1,500,000
D) $4,500,000
98) A study of Fortune 500 firms hedging practices shows that
A) over 90 percent of Fortune 500 firms use forward contracts.
B) over 90 percent of Fortune 500 firms use options contracts.
C) over 90 percent of Fortune 500 firms use both forward and options contracts.
D) none of the options
99) If default costs are significant,
A) corporate hedging would be justifiable because it will reduce the probability of default.
B) corporate hedging would be unjustifiable because it will increase the probability of default.
C) corporate hedging would be unjustifiable because it will increase the probability of default,
resulting in a decreased credit rating and higher financing costs.
D) none of the options
100) With respect to information asymmetry,
A) management knows about the firm's exposure position much better than stockholders, and
therefore should be the ones to manage exchange exposure.
B) stockholders know about the firm's exposure position much better than management, and
therefore should be the ones to manage exchange exposure.
C) regulators know about the firm's exposure position much better than management, and
therefore should be the ones to oversee exchange exposure.
D) none of the options
