Question 1

Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:​

Accepted Answer

A) positive. 
B) negative. 
C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. 
D) zero. 
A) positive. 
B) negative. 
C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. 
D) zero.

Question 2

Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to depreciate.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____.

Accepted Answer

A) leading 
B) lagging 
C) cross-hedging 
D) currency diversification 
E) all of the above 
A) leading 
B) lagging 
C) cross-hedging 
D) currency diversification 
E) all of the above

Question 7

A cross-hedging strategy is most effective with currencies that are _____, whereas currency diversification is most effective with currencies that are ______.

Accepted Answer

A) highly positively correlated; not highly correlated 
B) highly negatively correlated; not highly correlated 
C) expected to appreciate; expected to depreciate 
D) expected to depreciate; expected to appreciate 
A) highly positively correlated; not highly correlated 
B) highly negatively correlated; not highly correlated 
C) expected to appreciate; expected to depreciate 
D) expected to depreciate; expected to appreciate

Question 8

The real cost of hedging payables in Japanese yen is especially high when the yen appreciates over time.

Accepted Answer

A) True 
 B)False

Question 9

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)?​

Accepted Answer

A) $330,000 
B) $325,000 
C) $320,000 
D) $340,000 
A) $330,000 
B) $325,000 
C) $320,000 
D) $340,000

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Most MNCs can completely hedge all of their transactions.

Accepted Answer

A) True 
 B)False

Question 12

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 $____.

Accepted Answer

A) -25,000 
B) 25,000 
C) -107,000 
D) 10,700 
A) -25,000 
B) 25,000 
C) -107,000 
D) 10,700

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) have the same result as a call option hedge on payables 
B) have the same result as a put option hedge on payables 
C) have the same result as a money market hedge on payables 
D) require more dollars than a money market hedge 
E) A and D 
A) have the same result as a call option hedge on payables 
B) have the same result as a put option hedge on payables 
C) have the same result as a money market hedge on payables 
D) require more dollars than a money market hedge 
E) A and D

Question 15

>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:​

Accepted Answer

A) negative. 
B) zero. 
C) positive and large. 
D) positive and small. 
A) negative. 
B) zero. 
C) positive and large. 
D) positive and small.

Question 16

MNCs should hedge receivables using bear spreads only for currencies that are expected to appreciate substantially prior to option expiration.

Accepted Answer

A) True 
 B)False

Question 17

Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that the euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:​

Accepted Answer

A) sell euros forward 
B) purchase euro currency put options. 
C) purchase euro currency call options. 
D) purchase euros forward. 
E) remain unhedged. 
A) sell euros forward 
B) purchase euro currency put options. 
C) purchase euro currency call options. 
D) purchase euros forward. 
E) remain unhedged.

Question 18

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

Accepted Answer

A) $630,000 
B) $610,000 
C) $600,000 
D) $590,000 
E) $580,000 
A) $630,000 
B) $610,000 
C) $600,000 
D) $590,000 
E) $580,000

Question 19

Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that the euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:​

Accepted Answer

A) sell euros forward 
B) purchase euro currency put options. 
C) purchase euro currency call options. 
D) purchase euros forward. 
E) remain unhedged. 
A) sell euros forward 
B) purchase euro currency put options. 
C) purchase euro currency call options. 
D) purchase euros forward. 
E) remain unhedged.

Question 20

To hedge a receivables position with a currency option hedge, an MNC would buy a put option.

Accepted Answer

A) True 
 B)False

Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:

Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to depreciate.

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

If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge.

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

When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____.

A cross-hedging strategy is most effective with currencies that are _, whereas currency diversification is most effective with currencies that are __.

The real cost of hedging payables in Japanese yen is especially high when the yen appreciates over time.

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.

Most MNCs can completely hedge all of their transactions.

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 $____.

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.

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

>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:

MNCs should hedge receivables using bear spreads only for currencies that are expected to appreciate substantially prior to option expiration.

Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that the euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:

Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that the euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:

To hedge a receivables position with a currency option hedge, an MNC would buy a put option.

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 Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 11: Managing Transaction Exposure

Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:​

Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to depreciate.

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

If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge.

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

When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____.

A cross-hedging strategy is most effective with currencies that are _____, whereas currency diversification is most effective with currencies that are ______.

The real cost of hedging payables in Japanese yen is especially high when the yen appreciates over time.

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.

Most MNCs can completely hedge all of their transactions.

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 $____.

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.

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

>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:​

MNCs should hedge receivables using bear spreads only for currencies that are expected to appreciate substantially prior to option expiration.

Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that the euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:​

Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that the euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:​

To hedge a receivables position with a currency option hedge, an MNC would buy a put option.

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 Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:

A cross-hedging strategy is most effective with currencies that are _, whereas currency diversification is most effective with currencies that are __.

>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:

Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that the euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:

Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that the euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to: