Exam 8: Management of Transaction Exposure

Your firm is a U.K.-based exporter of bicycles.You have sold an order to a Swiss firm for SFr.1,000,000 worth of bicycles.Payment from the Swiss firm (in Swiss francs)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 an Italian exporter of bicycles.You have sold an order to a British firm for £1,000,000 worth of bicycles.Payment from the customer (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity. The following were computed without rounding.Select the answer closest to yours.

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.Use a money market hedge to redenominate this one-year receivable into a pound-denominated receivable with a one-year maturity. The following were computed without rounding.Select the answer closest to yours.

To hedge a foreign currency receivable,

Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an Italian firm for €1,000,000 worth of bicycles.Payment from the Italian firm (in €)is due in twelve months.Your firm wants to hedge the receivable into pounds.Not dollars.Use the following table for exchange rate data. Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type.

Your firm is an Italian exporter of bicycles.You have sold an order to a British firm for £1,000,000 worth of bicycles.Payment from the customer (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.

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

Your firm is a Swiss 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.

A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year. The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%.Detail a strategy using forward contracts that will hedge his exchange rate risk.Have an estimate of how many contracts of what type.

The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500.

Simplify the following set of intra company cash flows for this Swiss Firm. Consider the following exchange rates.

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.

Your firm is a U.K.-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 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.

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.Which of the following is NOT part of a money market hedge?

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

Since a corporation can hedge exchange rate exposure at low cost

A Japanese EXPORTER has a €1,000,000 receivable due in one year.Spot and forward exchange rate data given in the table: The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%.Detail a strategy using forward contracts that will hedge exchange rate risk.

To hedge a foreign currency payable,

Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts)are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts)are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00.For a French firm to hedge a £100,000 receivable,

Exchange rate risk of a foreign currency payable is an example of