Exam 11: Managing Transaction Exposure

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 $____.

Free

(Multiple Choice)

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Question 1

Correct Answer:

Verified

Most MNCs can completely hedge all of their transactions.

Free

(True/False)

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Question 2

Correct Answer:

Verified

False

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.

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(True/False)

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Question 3

Correct Answer:

Verified

True

A ____ is not normally used for hedging long-term transaction exposure.

(Multiple Choice)

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Question 4

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.

(True/False)

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Question 5

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.

(True/False)

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Question 6

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.

(True/False)

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Question 7

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?

(Multiple Choice)

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Question 8

If interest rate parity exists, the forward hedge will always outperform the money market hedge.

(True/False)

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Question 9

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.

(True/False)

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Question 10

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?

(Multiple Choice)

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Question 11

If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will:

(Multiple Choice)

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Question 12

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.

(True/False)

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Question 13

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.

(Multiple Choice)

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Question 14

If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.

(True/False)

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Question 15

To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures.

(True/False)

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Question 16

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.

(True/False)

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Question 17

Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the United States?

(Multiple Choice)

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Question 18

To hedge a payables position with a currency option hedge, an MNC would write a call option.

(True/False)

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Question 19

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:

(Multiple Choice)

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Question 20

Showing 1 - 20 of 73

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 $____.

Most MNCs can completely hedge all of their transactions.

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 ____ is not normally used for hedging long-term transaction exposure.

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.

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.

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.

If interest rate parity exists, the forward hedge will always outperform the money market hedge.

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.

If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will:

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.

If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.

To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures.

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.

To hedge a payables position with a currency option hedge, an MNC would write a call option.

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:

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 11: Managing Transaction Exposure

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 $____.

Most MNCs can completely hedge all of their transactions.

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 ____ is not normally used for hedging long-term transaction exposure.​

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.

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.

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. ​

If interest rate parity exists, the forward hedge will always outperform the money market hedge. ​

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.

If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will:

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.

If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.

To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures.

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.

To hedge a payables position with a currency option hedge, an MNC would write a call option.

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:​

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

A ____ is not normally used for hedging long-term transaction exposure.

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.

If interest rate parity exists, the forward hedge will always outperform the money market hedge.

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: