chapter11managingtransactionexposure.docx

chapter11managingtransactionexposure.docx

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chapter11managingtransactionexposure

Chapter11ManagingTransactionExposure

1.Assumezerotransactioncosts.Ifthe90-dayforwardrateoftheeuroisanaccurate

estimateofthespotrate90daysfromnow,thentherealcostofhedgingpayableswillbe:

A）positive.

B）negative.

C）positiveiftheforwardrateexhibitsapremium,andnegativeiftheforwardrate

exhibitsadiscount.

D）zero.

ANSWER:

D

2.Assumezerotransactioncosts.Ifthe180-dayforwardrateisanaccurateestimateofthe

spotrate180daysfromnow,thentherealcostofhedgingreceivableswillbe:

A）positive.

B）negative.

C）positiveiftheforwardrateexhibitsapremium,andnegativeiftheforwardrate

exhibitsadiscount.

D）zero.

ANSWER:

D

3.Assumethefollowinginformation:

.depositratefor1year=11%

.borrowingratefor1year=12%

Swissdepositratefor1year=8%

Swissborrowingratefor1year=10%

Swissforwardratefor1year=$.40

Swissfrancspotrate=$.39

Alsoassumethata.exporterdenominatesitsSwissexportsinSwissfrancsand

expectstoreceiveSF600,000in1year.

Usingtheinformationabove,whatwillbetheapproximatevalueoftheseexportsin1

yearin.dollarsgiventhatthefirmexecutesaforwardhedge

A）$234,000.

B）$238,584.

C）$240,000.

D）$236,127.

ANSWER:

C

SOLUTION:

SF600,000×$.40=$240,000

4.Assumethefollowinginformation:

.depositratefor1year=11%

.borrowingratefor1year=12%

NewZealanddepositratefor1year=8%

NewZealandborrowingratefor1year=10%

NewZealanddollarforwardratefor1year=$.40

NewZealanddollarspotrate=$.39

Alsoassumethata.exporterdenominatesitsNewZealandexportsinNZ$and

expectstoreceiveNZ$600,000in1year.Youareaconsultantforthisfirm.

Usingtheinformationabove,whatwillbetheapproximatevalueoftheseexportsin1

yearin.dollarsgiventhatthefirmexecutesamoneymarkethedge

A）$238,584.

B）$240,000.

C）$234,000.

D）$236,127.

ANSWER:

D

SOLUTION:

1.BorrowNZ$545,455（NZ$600,000/=NZ$545,455.

2.ConvertNZ$545,455to$212,727（at$.39perNZ$）.

3.Invest$212,727toaccumulate$236,127（$212,727×=$236,127.

5.Anexampleofcross-hedgingis:

A）findtwocurrenciesthatarehighlypositivelycorrelated;matchthepayablesofthe

onecurrencytothereceivablesoftheothercurrency.

B）usetheforwardmarkettosellforwardwhatevercurrenciesyouwillreceive.

C）usetheforwardmarkettobuyforwardwhatevercurrenciesyouwillreceive.

D）BandC

ANSWER:

A

6.WhichofthefollowingreflectsahedgeofnetreceivablesinBritishpoundsbya.

firm

A）purchaseacurrencyputoptioninBritishpounds.

B）sellpoundsforward.

C）borrow.dollars,convertthemtopounds,andinvesttheminaBritishpound

deposit.

D）AandB

ANSWER:

D

7.WhichofthefollowingreflectsahedgeofnetpayablesonBritishpoundsbya.firm

A）purchaseacurrencyputoptioninBritishpounds.

B）sellpoundsforward.

C）sellacurrencycalloptioninBritishpounds.

D）borrow.dollars,convertthemtopounds,andinvesttheminaBritishpound

deposit.

E）AandB

ANSWER:

D

8.IfLazerCo.desiredtolockinthemaximumitwouldhavetopayforitsnetpayablesin

eurosbutwantedtobeabletocapitalizeiftheeurodepreciatessubstantiallyagainstthe

dollarbythetimepaymentistobemade,themostappropriatehedgewouldbe:

A）amoneymarkethedge.

B）purchasingeuroputoptions.

C）aforwardpurchaseofeuros.

D）purchasingeurocalloptions.

E）sellingeurocalloptions.

ANSWER:

D

9.IfaSalernoInc.desiredtolockinaminimumrateatwhichitcouldsellitsnet

receivablesinJapaneseyenbutwantedtobeabletocapitalizeiftheyenappreciates

substantiallyagainstthedollarbythetimepaymentarrives,themostappropriatehedge

wouldbe:

A）amoneymarkethedge.

B）aforwardsaleofyen.

C）purchasingyencalloptions.

D）purchasingyenputoptions.

E）sellingyenputoptions.

ANSWER:

D

10.Therealcostofhedgingpayableswithaforwardcontractequals:

A）thenominalcostofhedgingminusthenominalcostofnothedging.

B）thenominalcostofnothedgingminusthenominalcostofhedging.

C）thenominalcostofhedgingdividedbythenominalcostofnothedging.

D）thenominalcostofnothedgingdividedbythenominalcostofhedging.

ANSWER:

A

11.FromtheperspectiveDetroitCo.thathaspayablesinMexicanpesosandreceivablesin

Canadiandollars,hedgingthepayableswouldbemostdesirableiftheexpectedrealcost

ofhedgingpayablesis_______,andhedgingthereceivableswouldbemostdesirableif

theexpectedrealcostofhedgingreceivablesis_______.

A）negative;positive

B）zero;positive

C）zero;zero

D）positive;negative

E）negative;negative

ANSWER:

E

12.Usethefollowinginformationtocalculatethedollarcostofusingamoneymarkethedge

tohedge200,000poundsofpayablesduein180days.Assumethefirmhasnoexcess

cash.Assumethespotrateofthepoundis$,the180-dayforwardrateis$.The

Britishinterestrateis5%,andthe.interestrateis4%overthe180-dayperiod.

A）$391,210.

B）$396,190.

C）$388,210.

D）$384,761.

E）noneoftheabove

ANSWER:

E

SOLUTION:

1.Needtoinvest￡190,476（￡200,000/=￡190,476.

2.Needtoexchange$384,762toobtainthe￡190,476（￡190,476×$=$384,762.

3.Attheendof180days,need$400,152torepayloan（$384,762×=$400,152.

13.AssumethatCooperCo.willnotuseitscashbalancesinamoneymarkethedge.When

decidingbetweenaforwardhedgeandamoneymarkethedge,it_______determine

whichhedgeispreferablebeforeimplementingthehedge.It_______determinewhether

eitherhedgewilloutperformanunhedgedstrategybeforeimplementingthehedge.

A）can;can

B）can;cannot

C）cannot;can

D）cannot;cannot

ANSWER:

B

14.FoghatCo.has1,000,000eurosasreceivablesduein30days,andiscertainthatthe

eurowilldepreciatesubstantiallyovertime.Assumingthatthefirmiscorrect,theideal

strategyisto:

A）selleurosforward.

B）purchaseeurocurrencyputoptions.

C）purchaseeurocurrencycalloptions.

D）purchaseeurosforward.

E）remainunhedged.

ANSWER:

A

15.SpearsCo.willreceiveSF1,000,000in30days.Usethefollowinginformationto

determinethetotaldollaramountreceived（afteraccountingfortheoptionpremium）if

thefirmpurchasesandexercisesaputoption:

Exerciseprice=$.61

Premium=$.02

Spotrate=$.60

Expectedspotratein30days=$.56

30-dayforwardrate=$.62

A）$630,000.

B）$610,000.

C）$600,000.

D）$590,000.

E）$580,000.

ANSWER:

D

SOLUTION:

（$.61-$.02）×SF1,000,000=$590,000

16.A_______involvesanexchangeofcurrenciesbetweentwoparties,withapromiseto

re-exchangecurrenciesataspecifiedexchangerateandfuturedate.

A）long-termforwardcontract

B）currencyswap

C）parallelloan

D）moneymarkethedge

ANSWER:

C

17.Ifinterestrateparityexistsandtransactionscostsarezero,thehedgingofpayablesin

euroswithaforwardhedgewill_______.

A）havethesameresultasacalloptionhedgeonpayables

B）havethesameresultasaputoptionhedgeonpayables

C）havethesameresultasamoneymarkethedgeonpayables

D）requiremoredollarsthanamoneymarkethedge

E）AandD

ANSWER:

C