Exam 8: Management of Transaction Exposure

Your firm has a British customer that is willing to place a $1 million order,but wants to pay in pounds instead of dollars.The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00.The lead time on the order is such that payment is due in one year.What is the fairest exchange rate to use?

A minor currency is

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.Step one: 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. Step two: ABC is considering implementing a hedging program that will eliminate their exchange rate risk: they will make a certain $15 million whether or not the dollar appreciates or depreciates.How much will they save in taxes if they implement the program?

A study of Fortune 500 firms hedging practices shows that

Suppose that $2 = £1,$1.60 = €1,and the cross exchange rate is €1.25 = £1.00.If you own a call option on £10,000 with a strike price of $1.50,you would exercise this option at maturity if

With any hedge

A 5-year swap contract can be viewed as a portfolio of 5 forward contracts with maturities of 1,2,3,4 and 5 years.One important exception is that

An exporter can shift exchange rate risk to their customers by

Contingent exposure can best be hedged with

The choice between a forward market hedge and a money market hedge often comes down to

Your firm is a U.K.-based importer of bicycles.You have placed an order with an Italian firm for €1,000,000 worth of bicycles.Payment (in euro)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

Your firm is a U.S.-based exporter of bicycles.You have sold an order to a French firm for €1,000,000 worth of bicycles.Payment from the French firm (in euro)is due in three months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and how much (in $)your firm will have.

Your firm is a Swiss exporter of bicycles.You have sold an order to a French firm for €1,000,000 worth of bicycles.Payment from the French firm (in euro)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a Swiss franc -denominated receivable with a one-year maturity. The following were computed without rounding.Select the answer closest to yours.

An exporter can share exchange rate risk with their customers by

The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is

A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with

Your firm is a Swiss importer of bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year pound denominated payable into a Swiss franc-denominated payable with a one-year maturity. The following were computed without rounding.Select the answer closest to yours.

Your firm is a Swiss exporter of bicycles.You have sold an order to a British firm for £1,000,000 worth of bicycles.Payment from the British firm (in pounds sterling)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

From the perspective of a corporate CFO,when hedging a payable versus a receivable

Your firm is an Italian importer of bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.