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Indicate whether the statement is true or false.
1. Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to
depreciate.
a.
True
b.
False
2. If interest rate parity exists, the forward hedge will always outperform the money market hedge.
a.
True
b.
False
3. 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
4. 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
5. 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.
a.
True
b.
False
6. MNCs should hedge receivables using bear spreads only for currencies that are expected to appreciate substantially
prior to option expiration.
a.
True
b.
False
7. The real cost of hedging payables in Japanese yen is especially high when the yen appreciates over time.
a.
True
b.
False
8. To hedge a receivables position with a currency option hedge, an MNC would buy a put option.
a.
True
b.
False
9. When the real cost of hedging payables is positive, this implies that hedging was more favorable than not hedging.
a.
True
b.
False
10. 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
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b.
False
11. Many MNCs use selective hedging, in which they consider each type of transaction separately.
a.
True
b.
False
12. To hedge a payables position with a currency option hedge, an MNC would write a call option.
a.
True
b.
False
13. 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
14. 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.
a.
True
b.
False
15. 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
16. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a.
True
b.
False
17. 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
18. 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
19. 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
20. When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called leading.
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a.
True
b.
False
21. The price at which a currency put option allows the holder to sell a currency is called the settlement price.
a.
True
b.
False
22. 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
23. If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.
a.
True
b.
False
24. 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
25. The trade-off 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
26. 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
27. A money market hedge involves taking a money market position to cover a future payables or receivables position.
a.
True
b.
False
28. 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
29. 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
30. Sometimes the overall performance of an MNC may already be insulated by offsetting effects between subsidiaries,
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and it may not be necessary to hedge the position of each individual subsidiary.
a.
True
b.
False
31. Most MNCs can completely hedge all of their transactions.
a.
True
b.
False
32. 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
33. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy
futures.
a.
True
b.
False
34. A futures hedge involves taking a money market position to cover a future payables or receivables position.
a.
True
b.
False
35. Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should be hedged.
a.
True
b.
False
36. Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
37. 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.
$92,307
38. You are the treasurer of Arizona Corp. and must decide how to hedge (if at all) future receivables of 350,000
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Australian dollars (A$) 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 $.50.
What is the probability that the put option will be exercised (assuming Arizona purchased it)?
a.
0 percent
b.
80 percent
c.
50 percent
d.
None of these are correct.
39. FAB Corp. will need 200,000 Canadian dollars (C$) 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
40. 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 these are correct.
41. 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.
42. 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
43. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current
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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.
$995,025
44. A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for
____ transactions.
a.
forward; small
b.
futures; large
c.
forward; large
d.
None of these are correct.
45. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) 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 these are correct.
46. 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
47. 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.
48. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.
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a.
receivable; purchase
b.
payable; sell
c.
payable; purchase
d.
None of these are correct.
49. 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.
Purchase a currency put option in British pounds AND sell pounds forward.
50. 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.
51. 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.
52. 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
53. 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
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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
Exhibit 11-1
Assume the following:
U.S.
Jordan
360-day borrowing rate
6%
5%
360-day deposit rate
5%
4%
54. 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
55. 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.
56. 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.
57. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.
a.
index
b.
futures
c.
forward
d.
money market
e.
currency option
58. Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the
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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.
59. An MNC wants to hedge against the potential risk that the euro denominating its payables appreciates against the
dollar. Yet, it also wants flexibility to benefit by buying euros at the spot rate when payables are due if the euro
depreciates by that time. The appropriate hedge for this MNC would be a(n) ____ hedge.
a.
money market
b.
futures
c.
put option
d.
call option
60. 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.
61. An example of cross-hedging is:
a.
obtain a forward contract to purchase a currency that is highly correlated with the currency in which the
payables are due.
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 pay.
d.
use the forward market to sell forward whatever currencies you will receive AND use the forward market to
buy forward whatever currencies you will pay.
62. A ____ does not represent an obligation.
a.
long-term forward contract
b.
currency swap
c.
parallel loan
d.
currency option
63. 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.
have the same result as a call option hedge on payables AND require more dollars than a money market hedge.
64. 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
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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
65. 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.
$344,000
66. If Salerno Inc. desires to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wants to
be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most
appropriate hedge would be:
a.
a money market hedge.
b.
a forward sale of yen.
c.
purchasing yen call options.
d.
purchasing yen put options.
e.
selling yen put options.
67. Lorre Co. needs 200,000 Canadian dollars (C$) 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?
a.
40 percent
b.
60 percent
c.
15 percent
d.
85 percent
68. 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:
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a.
positive.
b.
negative.
c.
positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d.
zero.
69. 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
70. 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
71. 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 these are correct.
72. Which of the following might be used to hedge exposure in the long run?
a.
long-term forward contract
b.
money market hedge
c.
parallel loan
d.
long-term forward contract AND parallel loan
73. 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%
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The probability that the forward hedge will result in more dollars received than not hedging is:
a.
10 percent.
b.
20 percent.
c.
30 percent.
d.
50 percent.
e.
70 percent.
74. 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
75. Hanson Corp. frequently uses a forward hedge to hedge its British pound (£) payables. For the next quarter, Hanson
has identified its net exposure to the pound as being £1,000,000. The 90-day forward rate is $1.50. Furthermore, Hanson’s
financial center has indicated that the predicted value of the British pound at the end of the next quarter is $1.57. Based on
this information, what is the expected real cost of hedging payables?
a.
$70,000
b.
–$70,000
c.
$0
d.
$1,570,000
76. Quasik Corp. will be receiving 300,000 Canadian dollars (C$) 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
77. 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
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c.
parallel loan
d.
money market hedge
Exhibit 11-1
Assume the following:
U.S.
Jordan
360-day borrowing rate
6%
5%
360-day deposit rate
5%
4%
78. 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
79. 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 these are correct.
80. 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
81. 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 these are correct.
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1. True
2. False
3. True
4. False
5. False
6. False
7. False
8. True
9. False
10. True
11. True
12. False
13. False
14. True
15. True
16. True
17. True
18. True
19. True
20. False
21. False
22. True
23. False
24. False
25. False
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52. a
53. c
54. d
55. a
56. a
57. a
58. a
59. d
60. a
61. a
62. d
63. c
64. b
65. e
66. d
67. a
68. b
69. b
70. c
71. c
72. d
73. c
74. d
75. b
76. c
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