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Chapter 11: Managing Transaction Exposure
38. Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement
the one that is more feasible.
a.
True
b.
False
39. If interest rate parity exists, the forward hedge will always outperform the money market hedge.
a.
True
b.
False
40. To hedge a contingent exposure, in which an MNC's exposure is contingent on a specific event occurring, the
appropriate hedge would be a(n) ____ hedge.
a.
money market
b.
futures
c.
forward
d.
options
41. A ____ is not normally used for hedging long-term transaction exposure.
a.
long-term forward contact
b.
futures contract
c.
currency swap
d.
parallel loan
42. A ____ does not represent an obligation.
a.
long-term forward contract
b.
currency swap
c.
parallel loan
d.
currency option
43. Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the MNC is
already insulated by the offsetting positions between subsidiaries.
a.
True
b.
False
44. If an MNC is extremely risk-averse, it may decide to hedge even though its hedging analysis indicates that remaining
unhedged will probably be less costly than hedging.
a.
True
b.
False
Chapter 11: Managing Transaction Exposure
45. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a.
True
b.
False
46. To hedge a payables position with a currency option hedge, an MNC would write a call option.
a.
True
b.
False
47. Many MNCs use selective hedging, in which they consider each type of transaction separately.
a.
True
b.
False
48. Currency futures are very similar to forward contracts, except that they are standardized and are more appropriate for
firms that prefer to hedge in smaller amounts.
a.
True
b.
False
Chapter 11: Managing Transaction Exposure
49. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy
futures.
a.
True
b.
False
50. When the real cost of hedging payables is positive, this implies that hedging was more favorable than not hedging.
a.
True
b.
False
51. A futures hedge involves taking a money market position to cover a future payables or receivables position.
a.
True
b.
False
52. If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.
a.
True
b.
False
Chapter 11: Managing Transaction Exposure
53. The price at which a currency put option allows the holder to sell a currency is called the settlement price.
a.
True
b.
False
54. A put option essentially represents two swaps of currencies: one swap at the inception of the loan contract and another
swap at a specified date in the future.
a.
True
b.
False
55. The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for
which a forward contract is available is referred to as cross-hedging.
a.
True
b.
False
56. The exact cost of hedging with call options (as measured in the text) is not known with certainty at the time that the
options are purchased.
Chapter 11: Managing Transaction Exposure
a.
True
b.
False
57. The tradeoff when considering alternative call options to hedge a currency position is that an MNC can obtain a call
option with a higher exercise price, but would have to pay a higher premium.
a.
True
b.
False
58. When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is more
desirable, because the cost of each hedge can be determined with certainty.
a.
True
b.
False
59. When comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge is more
desirable, because the cost of each hedge can be determined with certainty.
a.
True
b.
False
60. Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now,
then the real cost of hedging payables will be:
a.
positive.
b.
negative.
c.
positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d.
zero.
61. Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that the euro is going to appreciate
substantially over time. Assuming the firm is correct, the ideal strategy is to:
a.
sell euros forward
b.
purchase euro currency put options.
c.
purchase euro currency call options.
d.
purchase euros forward.
e.
remain unhedged.
62. Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that the euro is going to depreciate
substantially over time. Assuming the firm is correct, the ideal strategy is to:
a.
sell euros forward
b.
purchase euro currency put options.
c.
purchase euro currency call options.
d.
purchase euros forward.
e.
remain unhedged.
63. Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise
price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.66 and a premium
of $.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180
days is $.67, what is the amount received from the currency option hedge (after considering the premium paid)?
a.
$330,000
b.
$325,000
c.
$320,000
d.
$340,000
64. You are the treasurer of Montana Corp. and must decide how to hedge (if at all) future payables of 1,000,000 Japanese
yen 90 days from now. Call options are available with a premium of $.01 per unit and an exercise price of $.01031 per
Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is:
Future Spot Rate
Probability
$.01035
20%
$.01032
20%
$.01030
30%
$.01029
30%
The 90-day forward rate of the Japanese yen is $.01033.
What is the probability that the call option will be exercised (assuming Montana purchased it)?
a.
30 percent
b.
60 percent
c.
20 percent
d.
40 percent
65. A cross-hedging strategy is most effective with currencies that are _____, whereas currency diversification is most
effective with currencies that are ______.
a.
highly positively correlated; not highly correlated
b.
highly negatively correlated; not highly correlated
c.
expected to appreciate; expected to depreciate
d.
expected to depreciate; expected to appreciate
66. A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.
a.
the foreign currency; United States
b.
the foreign currency; foreign country
c.
dollars; foreign country
d.
dollars; United States
67. If a firm is hedging payables with futures contracts, it may end up paying more for the payables than it would have
had it remained unhedged if the foreign currency depreciates.
a.
True
b.
False
68. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a.
True
b.
False
69. To hedge a payables position in a foreign currency with a money market hedge, the MNC would borrow the foreign
currency, convert it to dollars, and invest that amount in the United States until the payables are due.
Chapter 11: Managing Transaction Exposure
a.
True
b.
False
70. If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge.
a.
True
b.
False
71. MNCs should hedge receivables using bear spreads only for currencies that are expected to appreciate substantially
prior to option expiration.
a.
True
b.
False
72. An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using
options is that a premium must be paid for it.
a.
True
b.
False
73. To hedge a receivables position with a currency option hedge, an MNC would buy a put option.
a.
True
b.
False
74. Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For
a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not)
exercised.
a.
True
b.
False
75. If hedging projections cause a firm to believe that it will definitely be adversely affected by its transaction exposure, a
currency option hedge is more appropriate than other methods.
a.
True
b.
False
76. Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.
a.
True
b.
False
77. Most MNCs can completely hedge all of their transactions.
a.
True
b.
False
78. When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called leading.
a.
True
b.
False
79. Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to
depreciate.
a.
True
b.
False
80. Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC
needs to hedge.
a.
True
b.
False
81. Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should be hedged.
a.
True
b.
False
