Exam 13: Management of Transaction Exposure

Which hedging technique is best to use to hedge recurrent exposure?

You would like to use money market hedge to hedge your £21M A/R next year.Current spot rate is 1.7$/£,home (U.S.)risk-free interest rate is 10% and U.K.risk-free interest rate is 5%,What is your next year dollar equivalent of these A/R if you have $25M debt at 12%:

In evaluating the pros and cons of corporate risk management,"market imperfections" refer to:

The steps involved in a money market hedge for a foreign currency receivable of a Canadian firm are in order:

Which of the following is not an operational hedge?

Suppose that Boeing Corporation exported a Boeing 747 to British Airways and billed £10 million payable in one year. The money market interest rates and foreign exchange rates are given as follows: The U.S. interest rate: 6.10% per annum The U.K. interest rate: 9.00% per annum The spot exchange rate: $1.50/£ The forward exchange rate: $1.46/£ (1-year maturity) -Assume that Boeing sells a currency forward contract of £10 million for delivery in one year,in exchange for a given amount of U.S.dollar.Which of the following is all true? On the maturity date of the contract Boeing will (i)- have to deliver £10 million to the bank (the counterparty of the contract) (ii)- take delivery of $14.6 million (iii)- have a zero net pound exposure (iv)- have a profit,or a loss,depending on the future changes in the exchange rate,from this British sale

Pile-of-Bones Inc.,headquartered in Regina,just bought snowblowers for US $100,000 to be paid in 90 days.As the financial manager,you are responsible for making a recommendation on the best hedging choice available to Pile-of-Bones Inc.You check with your banker and find out the following: The current spot rate is C$1.35/US$ and the 90-day forward rate is C$1.36/US$.The interest rates are 5% in the United States and 6% in Canada. a)What are the net payables if Pile-of-Bones uses a forward hedge? b)What are the net payables if Pile-of-Bones uses a money market hedge? c)Which type of hedge should Pile-of-Bones use?

Transaction exposure is defined as:

ABC Inc.,an exporting firm,expects to earn $20 million if the dollar depreciates,but only $10 million if the dollar appreciates.Assume that the dollar has an equal chance of appreciating or depreciating.Calculate the expected tax of ABC if it is operating in a foreign country that has progressive corporate taxes as shown below: Corporate income tax rate = 15% for the first $7,500,000. Corporate income tax rate = 30% for earnings exceeding $7,500,000.

Buying a currency options provides:

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. -The future dollar cost of meeting this obligation using the money market hedge is: (Round your final answer to nearest whole dollar and don't round intermediate calculations)

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. -The future dollar cost of meeting this obligation using the forward hedge is: (Round your final answer to nearest whole dollar)

Sonnenschein A.G.,a German retailer of solar panels just bought panels for US $100,000 to be paid in 120 days.As the financial manager,you are responsible for making a recommendation on the best hedging choice available to Sonnenschein A.G.You check with your banker and find out the following: The spot bid and ask rates are USD 1.1001/EUR and USD 1.0953/EUR respectively and the 120-day forward rates are EUR 0.8850/USD and EUR 0.8950/USD.Determine the net payables if Sonnenschein uses a forward hedge to manage its payables.

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. -Assume that the forward rate is the best predictor of the future spot rate.The future dollar cost of meeting this obligation using the option hedge is:

Encana Inc,a Canadian firm has a US dollar payable which it hedges using a forward market contract.The Canadian dollar is quoted directly.Which of the following statements is true?

ABC Corporation, located in Canada, has an accounts receivable of SF 1 million to be received in one year. The current spot rate is $0.80/SF and the six-month forward rate is $0.82/SF. The one year interest rates are 4.5 percent and 2 percent in Canada and Switzerland respectively. A one-year call option on Swiss franc at the strike price of $0.81 per Swiss franc for a premium of 0.2 cent per Swiss franc is available. -The future dollar amount of this receivable using the money market hedge is:

Suppose that Boeing Corporation exported a Boeing 747 to British Airways and billed £10 million payable in one year. The money market interest rates and foreign exchange rates are given as follows: The U.S. interest rate: 6.10% per annum The U.K. interest rate: 9.00% per annum The spot exchange rate: $1.50/£ The forward exchange rate: $1.46/£ (1-year maturity) -Suppose that on the maturity date of the forward contract,the spot rate turns out to be $1.40/£ (i.e.less than the forward rate of $1.46/£).Which of the following is true?

The most direct and popular way of hedging transaction exposure is by:

The steps involved in a money market hedge for a foreign currency payable of a Canadian firm are in order:

Soleil Inc.,a French manufacturer of sunscreen,has agreed to sell sunscreen to a Danish retailer for 2 million Danish kroner to be received in 180 days.The current spot rate is DKR5.02/EUR and the 180-day forward rate is DKR5.23/EUR.The current interest rates are 5% in Denmark and 4% in France.Should the firm use a forward hedge or a money market hedge?