Version 1 1
Student name:__________
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.
2) Which of the following is not a type of foreign currency exposure?
A) Exchange rate exposure
B) Economic exposure
C) Translation exposure
D) none of the options
3) __________ type of exposure is defined as the extent to which the value of the firm
would be affected by unanticipated changes in exchange rates.
A) Exchange rate exposure
B) Economic exposure
C) Translation exposure
D) none of the options
4) Which of the following is not a type of financial contract?
Version 1 2
A) Forward contract
B) Money market instrument
C) Options contract
D) none of the options
5) Which of the following is not a type of operational technique?
A) Swap strategy
B) Choice of the invoice currency
C) Lead/lag strategy
D) Exposure netting
6) The most direct and popular way of hedging transaction exposure is by
A) exchange-traded futures options.
B) currency forward contracts.
C) foreign currency warrants.
D) borrowing and lending in the domestic and foreign money markets.
7) If you have a long position in a foreign currency, you can hedge with
A) a short position in an exchange-traded futures option.
B) a short position in a currency forward contract.
C) a short position in foreign currency warrants.
D) borrowing (not lending) in the domestic and foreign money markets.
8) If you owe a foreign currency denominated debt, you can hedge with
Version 1 3
A) a short position in a currency forward contract.
B) a short position in an exchange-traded futures option.
C) buying the foreign currency today and investing it in the foreign county.
D) a long position in a currency forward contract, or buying the foreign currency today
and investing it in the foreign county.
9) 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.
10) 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
11) 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
Version 1 4
12) 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
13) 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.
14) 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
15) The choice between a forward market hedge and a money market hedge often comes
down to
Version 1 5
A) interest rate parity.
B) option pricing.
C) flexibility and availability.
D) none of the options
16) 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
17) A CFO should be least worried about
A) transaction exposure.
B) translation exposure.
C) economic exposure.
D) none of the options
18) 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
19) A stock market investor would pay attention to
Version 1 6
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
20) 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
1. (i) have to deliver €10 million to the bank (the counter party of the forward contract).
2. (ii) take delivery of $14.6 million
3. (iii) have a zero net euro exposure
4. (iv) have a profit, or a loss, depending on the future changes in the exchange rate, from this
British sale.
Version 1 7
A) (i) and (iv)
B) (ii) and (iv)
C) (ii), (iii), and (iv)
D) (i), (ii), and (iii)
21) 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 $14.6 million, rather than $14.0 million, had it not
entered into the forward contract.
B) Boeing lost $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
22) 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.
Version 1 8
Country
U.S.S equiv.
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
0.7575758
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.
23) 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
Version 1 9
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
24) Your firm has a British customer that is willing to place a $1 million order, but wants to
pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year
forward rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year.
What is the fairest exchange rate to use?
A) $1.85 = £1.00
B) $1.8750 = £1.00
C) $1.90 = £1.00
D) none of the options
25) Your firm has a British customer that is willing to place a $1 million order (with payment
due in 6 months), but insists upon paying in pounds instead of dollars.
A) The customer essentially wants you to discount your price by the value of a put
option on pounds.
B) The customer essentially wants you to discount your price by the value of a call
option on pounds.
C) The customer essentially wants you to discount your price by the sum of the values
of a call and put option on pounds.
D) none of the options
Version 1 10
26) Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an
American firm for $1,000,000 worth of bicycles. Payment from the American firm (in U.S.
dollars) is due in six months. Detail a strategy using futures contracts that will hedge your
exchange rate risk.
Country
U.S.$ equiv.
Currency per U.S.$
Tuesday
Monday
Tuesday
Monday
Britain(pound)£62,500
1.8000
1.8100
0.5556
0.5525
1 Month Forward
1.8100
1.8300
0.5525
0.5464
3 Months Forward
1.8300
1.8600
0.5464
0.5376
6 Months Forward
1.8600
1.8200
0.5376
0.5495
12 Months Forward
1.8200
1.8000
0.5495
0.5556
A) Go short 12 six-month futures contracts; pay £555,600.
B) Go short 9 six-month futures contracts. Pay approximately £537,600.
C) Go long 12 six-month futures contracts. Receive approximately £549,500.
D) Go long 9 six-month futures contracts; raise approximately £537,600.
27) Your firm is a U.S.-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 three 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 how much (in $) your firm will have.
Country
U.S.$ 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
Version 1 11
A) Go short 12 six-month forward contracts; pay $1,630,000.
B) Go short 16 six-month forward contracts; pay $1,630,000.
C) Go long 16 six-month forward contracts; raise $1,660,000.
D) Go long 12 six-month forward contracts; receive $1,660,000.
28) 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
Version 1 12
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
29) 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
Version 1 13
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
30) 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
Version 1 14
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
Version 1 15
31) 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
Version 1 16
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
32) 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
Version 1 17
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
33) 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
Version 1 18
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
34) Your firm is a U.K.-based exporter of bicycles. You have sold an order to a Swiss firm
for SFr. 1,000,000 worth of bicycles. Payment from the Swiss firm (in Swiss francs) 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.
Version 1 19
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
Version 1 20
A) Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound
futures contracts.
B) Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound
futures contracts.
C) Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound
futures contracts.
D) Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound
futures contracts.
E) none of the options
35) Your firm is a U.K.-based importer of bicycles. You have placed an order with a Swiss
firm for SFr. 1,000,000 worth of bicycles. Payment (in Swiss francs) 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
Version 1 21
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 Swiss franc futures contracts; and long 50 12-month pound
futures contracts.
B) Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound
futures contracts.
C) Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound
futures contracts.
D) Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound
futures contracts.
E) none of the options
36) 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. 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
Version 1 22
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 pound futures contracts; and long 200 12-month SFr. futures
contracts.
B) Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures
contracts.
C) Go short 100 12-month pound futures contracts; and short 200 12-month SFr. futures
contracts.
D) Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures
contracts.
E) none of the options
37) 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. 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.
Version 1 23
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
Version 1 24
A) Go short 100 12-month pound futures contracts; and long 200 12-month SFr. futures
contracts.
B) Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures
contracts.
C) Go short 100 12-month pound futures contracts.
D) Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures
contracts.
E) none of the options
38) 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. 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
Version 1 25
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 200 12-month Swiss franc futures contracts; and long 125 12-month euro
futures contracts.
B) Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro
futures contracts.
C) Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro
futures contracts.
D) Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro
futures contracts.
E) none of the options
39) 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. 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
Version 1 26
€
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 200 12-month Swiss franc futures contracts; and long 125 12-month euro
futures contracts.
B) Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro
futures contracts.
C) Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro
futures contracts.
D) Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro
futures contracts.
E) none of the options
40) 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.
Use a money market hedge to redenominate this one-year receivable into a pound-denominated
receivable with a one-year maturity.
Contract Size
Country
U.S. $
equiv.
Currency per
U.S. $
Version 1 27
£
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) £803,721.49
B) €800,000
C) £780,312.13
D) £72,352.94
41) 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. Use a money
market hedge to redenominate this one-year receivable into a pound-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
%
Version 1 28
The following were computed without rounding. Select the answer closest to yours.
A) £803,721.49
B) €800,000
C) £780,312.13
D) £72,352.94
42) 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. Use a
money market hedge to redenominate this one-year receivable into a Swiss franc-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. 1,728,900.26
B) SFr. 1,600,000
C) SFr. 1,544,705.88
D) SFr. 800,000
Version 1 29
43) 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. Use a money market
hedge to redenominate this one-year receivable into a Swiss franc-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. 1,728,900.26
B) SFr. 1,600,000
C) SFr. 1,544,705.88
D) SFr. 800,000
44) 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. 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
%
Version 1 30
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) €1,225,490.20
B) €1,244,212.10
C) €1,250,000
D) €1,219,815.78
45) Your firm is an Italian importer of British 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 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.
Version 1 31
A) €1,225,490.20
B) €1,244,212.10
C) €1,250,000
D) €1,219,815.78
46) Your firm is a U.K.-based exporter of bicycles. You have sold an order to a Swiss firm
for SFr. 1,000,000 worth of bicycles. Payment from the Swiss firm (in Swiss francs) 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) £500,000
B) £464,874.41
C) £446,730.77
D) £509,900.99
Version 1 32
47) Your firm is a U.K.-based importer of bicycles. You have placed an order with a Swiss
firm for SFr. 1,000,000 worth of bicycles. Payment (in Swiss francs) 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) £500,000
B) £464,874.41
C) £446,730.77
D) £509,900.99
48) 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
%
Version 1 33
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
49) 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.
Version 1 34
A) SFr. 2,000,000
B) SFr. 2,151,118.62
C) SFr. 2,068,383.28
D) SFr. 1,921,941.75
50) 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
Version 1 35
51) 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
52) 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
Version 1 36
53) 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.
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
0.7575758
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
54) 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
%
Version 1 37
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.
55) 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. Assume the one-year dollar interest rate is
6.1% and 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 $1,640,000 on the sale net of the cost of hedging.
D) none of the options
56) Buying a currency option provides
Version 1 38
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
57) 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.
58) 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¥100
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
59) 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
Version 1 39
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¥100
A) $20,000
B) $5,000
C) $12,500
D) none of the options
60) 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
61) 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
Version 1 40
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
62) 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.
63) 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.
Version 1 41
64) 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.
65) 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.
66) 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.
67) A call option on £1,000 with a strike price of €1,250 is equivalent to
Version 1 42
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.
68) 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
69) 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
70) 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
Version 1 43
A) $6,450,000.
B) $6,545,400.
C) $6,653,833.
D) $6,880,734.
71) 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
72) 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
73) 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,
Version 1 44
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.
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 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.
75) 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.
76) 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,
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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.
77) 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
78) 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
79) 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,
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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.
80) 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
81) 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.
82) 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
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83) 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.
84) 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
85) Contingent exposure can best be hedged with
A) options.
B) money market hedging.
C) futures.
D) all of the options
86) 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
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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
87) 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
88) Generally speaking, a firm with recurrent exposure can best hedge using which product?
A) Options
B) Swaps
C) Futures
D) all of the options
89) 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
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90) 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
91) 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.
92) 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) Both B and C are correct.
93) An exporter faced with exposure to a depreciating currency can reduce transaction
exposure with a strategy of
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A) paying or collecting early.
B) paying or collecting late.
C) paying late, collecting early.
D) paying early, collecting late.
94) 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.
95) 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
96) 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
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97) 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
98) 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
99) 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.
100) 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.
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A) $3,375,000
B) $6,000,000
C) $1,500,000
D) $4,500,000
101) 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
102) 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
103) If default costs are significant,
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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
104) 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
105) Which of the following call and put option statement is not correct?
A) A currency call option gives the holder the right, but not the obligation, to buy a
certain amount of foreign currency at a specific exchange rate up to or at the maturity date.
B) A currency put option gives the holder the right, but not the obligation, to sell a
certain amount of foreign currency at a specific exchange rate again up to or at the maturity date.
C) The price of call or put options that option buyers have to pay is called premium.
D) none of the options
106) Which of the following statements illustrates the discord between the stated internal risk
management policies and the actual practices conducted in a recent study of 101 large non-
financial corporations in South Korea (Kim & Chance, 2018)
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A) 53% of companies stated that they engage in internal risk management to control
exchange rate risk.
B) 86% reported in engaging in external risk management.
C) 38% of companies practice their stated risk management when they state they engage
in internal risk management.
D) none of the options
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Answer Key
Test name: chapter 8
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