36. Which of the following is the least effective way of hedging exposure in the long run?
a.
long-term forward contract.
b.
currency swap.
c.
parallel loan.
d.
money market hedge.
37. When a perfect hedge is not available to eliminate transaction exposure, the firm may consider
methods to at least reduce exposure, such as ____.
a.
leading
b.
lagging
c.
cross-hedging
d.
currency diversification
e.
all of the above
38. Sometimes the overall performance of an MNC may already be insulated by offsetting effects between
subsidiaries and it may not be necessary to hedge the position of each individual subsidiary.
a. True
b. False
39. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.
a.
receivable; purchase
b.
payable; sell
c.
payable; purchase
d.
none of the above
40. A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are
commonly used for ____ transactions.
a.
forward; small
b.
futures; large
c.
forward; large
d.
none of the above
41. 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. There is a 40 percent chance that the spot rate of the euro in 90 days will be $1.02,
and a 60 percent chance that the spot rate of the euro in 90 days will be $1.09. Based on this
information, the expected value of the real cost of hedging payables is $____.
a.
−35,000
b.
25,000
c.
−1,000
d.
1,000
42. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of
hedging payables will be:
a.
highly positive.
b.
highly negative.
c.
zero.
d.
none of the above
43. If an MNC is hedging various currencies, it should measure the real cost of hedging in each currency
as a dollar amount for comparison purposes.
a. True
b. False
44. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German
security. The current spot rate for the euro is $1.00. Samson can borrow funds in the U.S. at an
annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it
borrow in the U.S.?
a.
$952,381.
b.
$995,851.
c.
$943,396.
d.
$995,025.
45. 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 U.S. 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.
46. 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
47. If interest rate parity exists, the forward hedge will always outperform the money market hedge.
a. True
b. False
48. To hedge a contingent exposure, in which an MNC‘s exposure is contingent on a specific event
occurring, the appropriate hedge would be a(n) ____ hedge.
a.
money market
b.
futures
c.
forward
d.
options
49. 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
50. The ____ does not represent an obligation.
a.
long-term forward contract
b.
currency swap
c.
parallel loan
d.
currency option
51. 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
52. 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
53. A money market hedge involves taking a money market position to cover a future payables or
receivables position.
a. True
b. False
54. To hedge a payable position with a currency option hedge, an MNC would write a call option.
a. True
b. False
55. MNCs generally do not need to hedge because shareholders can hedge their own risk.
a. True
b. False
56. 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
57. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an
MNC would buy futures.
a. True
b. False
58. When the real cost of hedging is positive, this implies that hedging was more favorable than not
hedging.
a. True
b. False
59. A futures hedge involves taking a money market position to cover a future payables or receivables
position.
a. True
b. False
60. If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the
options hedge.
a. True
b. False
61. The price at which a currency put option allows the holder to sell a currency is called the settlement
price.
a. True
b. False
62. 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
63. 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
64. 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
65. The tradeoff when considering alternative call options to hedge a currency position is that an MNC can
obtain a call option with a higher exercise price, but would have to pay a higher premium.
a. True
b. False
66. 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
67. 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
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:
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. Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that 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.
70. Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that 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
71. Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option
with an exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an
exercise price of $.66 and a premium of $.02 is available. Mender plans to purchase options to hedge
its receivables position. Assuming that the spot rate in 180 days is $.67, what is the amount received
from the currency option hedge (after considering the premium paid)?
a.
$330,000
b.
$325,000
c.
$320,000
d.
$340,000
72. You are the treasurer of Montana Corporation 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%
b.
60%
c.
20%
d.
40%
73. If an MNC assesses net transaction exposure, this refers to the consolidation of all expected inflows for
a particular time and currency.
a. True
b. False
74. Most MNCs do not perceive their foreign exchange management as a profit center. Rather, their main
responsibility is to assess potential exposure and determine how and if the exposure should be hedged.
a. True
b. False
75. If a firm is hedging payables with futures contracts, it may end up paying more for the payable than it
would have had it remained unhedged if the foreign currency depreciates.
a. True
b. False
76. A money market hedge involves taking a money market position to cover a future payables or
receivables position.
a. True
b. False
77. To hedge a payable 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 U.S. until the payable
is due.
a. True
b. False
78. 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
79. To hedge a payable position with a currency option hedge, an MNC would write a call option.
a. True
b. False
80. An advantage of using options to hedge is that the MNC can let the option expire. However, a
disadvantage of using options is that a premium must be paid for it.
a. True
b. False
81. To hedge a receivable position with a currency option hedge, an MNC would buy a put option.
a. True
b. False
82. 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
83. 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
84. Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.
a. True
b. False
85. Most MNCs can completely hedge all of their transactions.
a. True
b. False
86. When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called
leading.
a. True
b. False
87. Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is
expected to depreciate.
a. True
b. False
88. 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
89. Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should
be hedged.
a. True
b. False
90. 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
91. A money market hedge on payables would involve, among others, borrowing ____ and investing in the
____.
a.
the foreign currency; U.S.
b.
the foreign currency; foreign country
c.
dollars; foreign country
d.
dollars; U.S.
92. FAI Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call
option with an exercise price of $0.75 and a premium of $0.01 is available. Also, a 90-day put option
with an exercise price of $0.73 and a premium of $0.01 is available. FAI plans to purchase options to
hedge its receivable position. Assuming that the spot rate in 90 days is $0.71, what is the net amount
received from the currency option hedge?
a.
$219,000
b.
$222,000
c.
$216,000
d.
$213,000