Exam 11: Managing Transaction Exposure

Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.​

Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option: Exercise price = $)61 Premium = $)02 Spot rate = $)60 Expected spot rate in 30 days = $)56 30-day forward rate = $)62 ​

An MNC wants to hedge against the potential risk that the euro denominating its payables appreciates against the dollar. Yet, it also wants flexibility to benefit by buying euros at the spot rate when payables are due if the euro depreciates by that time. The appropriate hedge for this MNC would be a(n) ____ hedge.

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.

Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:​

When the real cost of hedging payables is positive, this implies that hedging was more favorable than not hedging.

To hedge a payables position in a foreign currency with a money market hedge, the MNC would borrow the foreign currency, convert it to dollars, and invest that amount in the United States until the payables are due.

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:​

Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge.

Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:

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.

When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called leading.

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.

If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.

Quasik Corp. will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. Quasik plans to purchase options to hedge its receivables position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge?

A money market hedge involves taking a money market position to cover a future payables or receivables position. ​

Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.

A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions.

From the perspective of Detroit Co., which has payables in Mexican pesos, hedging the payables is especially beneficial if the expected real cost of hedging the payables is:

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. ​