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Chapter 11: Managing Transaction Exposure
1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of 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.
2. Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 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.
3. Assume the following information:
U.S. deposit rate for 1 year
=
11%
U.S. borrowing rate for 1 year
=
12%
Swiss deposit rate for 1 year
=
8%
Swiss borrowing rate for 1 year
=
10%
Swiss forward rate for 1 year
=
$.40
Swiss franc spot rate
=
$.39
Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1
year.
Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the
firm executes a forward hedge?
a.
$234,000
b.
$238,584
c.
$240,000
d.
$236,127
4. An example of cross-hedging is:
a.
find two currencies that are highly positively correlated; match the payables in one currency to the receivables
in the other currency.
b.
use the forward market to sell forward whatever currencies you will receive.
c.
use the forward market to buy forward whatever currencies you will receive.
d.
B and C
5. Which of the following reflects a hedge of net payables in British pounds by a U.S. firm?
a.
Purchase a currency put option in British pounds.
b.
Sell pounds forward.
c.
Sell a currency call option in British pounds.
d.
Borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
e.
A and B
6. If Salerno Inc. desires to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wants to
be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most
appropriate hedge would be:
a.
a money market hedge.
b.
a forward sale of yen.
c.
purchasing yen call options.
d.
purchasing yen put options.
e.
selling yen put options.
7. The real cost of hedging payables with a forward contract equals:
a.
the dollar cost of hedging minus the dollar cost of not hedging.
b.
the dollar cost of not hedging minus the dollar cost of hedging.
c.
the dollar cost of hedging divided by the dollar cost of not hedging.
d.
the dollar cost of not hedging divided by the dollar cost of hedging.
8. >From the perspective of Detroit Co., which has payables in Mexican pesos, hedging the payables is especially
beneficial if the expected real cost of hedging the payables is:
a.
negative.
b.
zero.
c.
positive and large.
d.
positive and small.
9. Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward
hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____
determine whether either hedge will outperform an unhedged strategy before implementing the hedge.
a.
can; can
b.
can; cannot
c.
cannot; can
d.
cannot; cannot
10. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially
over time. Assuming that 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.
11. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount
received (after accounting for the option premium) if the firm purchases and exercises a put option:
Exercise price
=
$.61
Premium
=
$.02
Spot rate
=
$.60
Expected spot rate in 30 days
=
$.56
30-day forward rate
=
$.62
a.
$630,000
b.
$610,000
c.
$600,000
d.
$590,000
e.
$580,000
12. A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a
specified exchange rate and future date.
a.
long-term forward contract
b.
currency option contract
c.
parallel loan
d.
money market hedge
Chapter 11: Managing Transaction Exposure
13. If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will
____.
a.
have the same result as a call option hedge on payables
b.
have the same result as a put option hedge on payables
c.
have the same result as a money market hedge on payables
d.
require more dollars than a money market hedge
e.
A and D
14. Assume that Parker Co. will receive SF200,000 in 360 days. Assume the following interest rates:
U.S.
Switzerland
360-day borrowing rate
7%
5%
360-day deposit rate
6%
4%
Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. If Parker Co. uses a money
market hedge, it will receive ____ in 360 days.
a.
$101,904
b.
$101,923
c.
$98,769
d.
$96,914
e.
$92,307
15. Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is $.80. If you use a
forward hedge, you will:
a.
receive $750,000 today.
b.
receive $750,000 in 90 days.
c.
pay $750,000 in 90 days.
d.
receive $480,000 today.
e.
receive $480,000 in 90 days.
16. Assume that Smith Corp. will need to purchase 200,000 British pounds in 90 days. A call option exists on British
pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $.04. A put option exists on British
pounds with an exercise price of $1.69, a 90-day expiration date, and a premium of $.03. Smith Corporation plans to
purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the
pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for
the option premium.
a.
$360,000
b.
$338,000
c.
$332,000
d.
$336,000
e.
$344,000
17. Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is $.62, and the 90-
day forward rate is $.635. Kramer has developed the following probability distribution for the spot rate in 90 days:
Possible Spot Rate
in 90 Days
Probability
$.61
10%
$.63
20%
$.64
40%
$.65
30%
The probability that the forward hedge will result in more dollars received than not hedging is:
Chapter 11: Managing Transaction Exposure
a.
10 percent.
b.
20 percent.
c.
30 percent.
d.
50 percent.
e.
70 percent.
18. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the NZ$ is
$.50, and the 180-day forward rate is $.51. A call option on NZ$ exists, with an exercise price of $.52, a premium of $.02,
and a 180-day expiration date. A put option on NZ$ exists with an exercise price of $.51, a premium of $.02, and a 180-
day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days:
Possible Spot Rate
in 90 Days
Probability
$.48
10%
$.49
60%
$.55
30%
The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ____ (deduct the
amount paid for the premium when estimating the U.S. dollars received on the options hedge).
a.
10 percent
b.
30 percent
c.
40 percent
d.
70 percent
e.
none of the above
19. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.
a.
index
Chapter 11: Managing Transaction Exposure
b.
futures
c.
forward
d.
money market
e.
currency option
20. Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month,
Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is $.23.
Furthermore, Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next
month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from
hedging minus the revenue from not hedging receivables is____.
a.
$0.
b.
−$7,500.
c.
$7,500.
d.
none of the above
U.S.
Jordan
360-day borrowing rate
6%
5%
360-day deposit rate
5%
4%
21. Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of
the dinar is $1.48, while the 360-day forward rate is $1.50. How much will Perkins receive in 360 days from
implementing a money market hedge (assume any receipts before the date of the receivable are invested)?
a.
$377,115
b.
$373,558
c.
$363,019
d.
$370,000
Chapter 11: Managing Transaction Exposure
22. Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the
dinar is $1.48, while the 360-day forward rate is $1.46. What is Pablo's cost from implementing a money market hedge
(assume Pablo does not have any excess cash)?
a.
$224,135
b.
$226,269
c.
$224,114
d.
$223,212
23. Lorre Co. needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this
position. Lorre has developed the following probability distribution for the Canadian dollar:
Possible Value of
Canadian Dollar in 90 Days
Probability
$0.54
15%
0.57
25%
0.58
35%
0.59
25%
The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of the Canadian dollar in 90 days is
$.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not
hedging?
Chapter 11: Managing Transaction Exposure
a.
40 percent
b.
60 percent
c.
15 percent
d.
85 percent
24. Quasik Corp. will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call option with an
exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a
premium of $.01 is available. Quasik plans to purchase options to hedge its receivables position. Assuming that the spot
rate in 90 days is $.71, what is the net amount received from the currency option hedge?
a.
$219,000
b.
$222,000
c.
$216,000
d.
$213,000
25. FAB Corp. will need 200,000 Canadian dollars (C$) in 90 days to cover a payables position. Currently, a 90-day call
option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price
of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payables position. Assuming that
the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost?
a.
$144,000
b.
$148,000
c.
$152,000
d.
$150,000
26.
You are the treasurer of Arizona Corp. and must decide how to hedge (if at all) future receivables of 350,000 Australian
dollars (A$) 180 days from now. Put options are available for a premium of $.02 per unit and an exercise price of $.50 per
Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is:
Future Spot Rate
Probability
$.46
20%
$.48
30%
$.52
50%
The 90-day forward rate of the Australian dollar is $.50.
What is the probability that the put option will be exercised (assuming Arizona purchased it)?
a.
0 percent
b.
80 percent
c.
50 percent
d.
none of the above
27. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as
the ____ hedge.
a.
put option
b.
forward
c.
call option
d.
none of the above
28. Which of the following might be used to hedge exposure in the long run?
a.
long-term forward contract
b.
money market hedge
Chapter 11: Managing Transaction Exposure
c.
parallel loan
d.
A and C
29. When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least
reduce exposure, such as ____.
a.
leading
b.
lagging
c.
cross-hedging
d.
currency diversification
e.
all of the above
30. Sometimes the overall performance of an MNC may already be insulated by offsetting effects between subsidiaries,
and it may not be necessary to hedge the position of each individual subsidiary.
a.
True
b.
False
31. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.
a.
receivable; purchase
b.
payable; sell
c.
payable; purchase
d.
none of the above
32. A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for
____ transactions.
a.
forward; small
b.
futures; large
c.
forward; large
d.
none of the above
33. Celine Co. will need €500,000 in 90 days to pay for German imports. Today's 90-day forward rate of the euro is $1.07.
The spot rate of the euro in 90 days is forecasted to be $1.02. Based on this information, the expected value of the real
cost of hedging payables is $____.
a.
−25,000
b.
25,000
c.
−107,000
d.
10,700
34. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables
will be:
a.
highly positive.
b.
highly negative.
c.
zero.
d.
none of the above
35. The real cost of hedging payables in Japanese yen is especially high when the yen appreciates over time.
a.
True
b.
False
36. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current
spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If
Samson uses a money market hedge, how much should it borrow in the United States?
a.
$952,381
b.
$995,851
c.
$943,396
d.
$995,025
37. Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate
for the euro is $1.00. Blake can borrow funds in the United States at an annualized interest rate of 6 percent. If Blake uses
a money market hedge to hedge the payable, what is the cost of implementing the hedge?
a.
$1,000,000
b.
$1,055,602
c.
$1,000,830
d.
$1,045,644
