Question 1

Your U.S.firm has a £100,000 payable with a 3-month maturity.Which of the following will hedge your liability?

Accepted Answer

A) Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K.at i£. 
B) Buy a call option on £100,000 with a strike price in dollars. 
C) Take a long position in a forward contract on £100,000 with a 3-month maturity. 
D) All of the above 
A) Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K.at i£. 
B) Buy a call option on £100,000 with a strike price in dollars. 
C) Take a long position in a forward contract on £100,000 with a 3-month maturity. 
D) All of the above

Question 2

Transaction exposure is defined as

Accepted Answer

A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. 
B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate. 
C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates. 
D) ex post and ex ante currency exposures. 
A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. 
B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate. 
C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates. 
D) ex post and ex ante currency exposures.

Question 3

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.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.

Accepted Answer

A) SFr.2,000,000 
B) SFr.2,151,118.62 
C) SFr.2,068,383.28 
D) SFr.1,921,941.75 
A) SFr.2,000,000 
B) SFr.2,151,118.62 
C) SFr.2,068,383.28 
D) SFr.1,921,941.75

Question 4

Generally speaking,a firm with recurrent exposure can best hedge using which product?

Accepted Answer

A) Options 
B) Swaps 
C) Futures 
D) All of the above 
A) Options 
B) Swaps 
C) Futures 
D) All of the above

Question 5

A CFO should be least worried about

Accepted Answer

A) transaction exposure. 
B) translation exposure. 
C) economic exposure. 
D) none of the above 
A) transaction exposure. 
B) translation exposure. 
C) economic exposure. 
D) none of the above

Question 6

A stock market investor would pay attention to

Accepted Answer

A) anticipated changes in exchange rates that have been already discounted and reflected in the firm's value. 
B) unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value. 
A) anticipated changes in exchange rates that have been already discounted and reflected in the firm's value. 
B) unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value.

Question 7

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.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.

Accepted Answer

A) Go short 100 12-month pound futures contracts; and long 200 12-month SFr.futures contracts. 
B) Go long 100 12-month pound futures contracts; and short 200 12-month SFr.futures contracts. 
C) Go short 100 12-month pound futures contracts. 
D) Go long 100 12-month pound futures contracts; and long 200 12-month SFr.futures contracts. 
E) None of the above 
A) Go short 100 12-month pound futures contracts; and long 200 12-month SFr.futures contracts. 
B) Go long 100 12-month pound futures contracts; and short 200 12-month SFr.futures contracts. 
C) Go short 100 12-month pound futures contracts. 
D) Go long 100 12-month pound futures contracts; and long 200 12-month SFr.futures contracts. 
E) None of the above

Question 8

Your firm is bidding on a large construction contract in a foreign country.This contingent exposure could best be hedged

Accepted Answer

A) with put options on the foreign currency. 
B) with call options on the foreign currency. 
C) both a) and b), depending upon the specifics ("the rest of the story"). 
D) with futures contracts. 
A) with put options on the foreign currency. 
B) with call options on the foreign currency. 
C) both a) and b), depending upon the specifics ("the rest of the story"). 
D) with futures contracts.

Question 9

Your firm is an Italian importer of bicycles.You have placed an order with a Swiss firm for SFr.2,000,000 worth of bicycles.Payment (in francs)is due in 12 months.Use a money market hedge to redenominate this one-year franc denominated payable into a euro-denominated payable with a one-year maturity.   The following were computed without rounding.Select the answer closest to yours.

Accepted Answer

A) €1,116,826.92 
B) €1,250,000 
C) €1,134,122.29 
D) €1,156,804.73 
A) €1,116,826.92 
B) €1,250,000 
C) €1,134,122.29 
D) €1,156,804.73

Question 10

On a recent sale,Boeing allowed British Airways to pay either $18 million or £10 million.

Accepted Answer

A) At the due date, British airways will be indifferent between paying dollars or pounds since they would of course have hedged their exposure either way. 
B) Boeing has provided British Airways with a free option to buy $18 million with an exercise price of £10 million. 
C) Boeing has provided British Airways with a free option to sell up to £10 million with an exercise price of $18 million. 
D) All of the above 
A) At the due date, British airways will be indifferent between paying dollars or pounds since they would of course have hedged their exposure either way. 
B) Boeing has provided British Airways with a free option to buy $18 million with an exercise price of £10 million. 
C) Boeing has provided British Airways with a free option to sell up to £10 million with an exercise price of $18 million. 
D) All of the above

Question 11

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.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.

Accepted Answer

A) SFr.1,728,900.26 
B) SFr.1,600,000 
C) SFr.1,544,705.88 
D) SFr.800,000 
A) SFr.1,728,900.26 
B) SFr.1,600,000 
C) SFr.1,544,705.88 
D) SFr.800,000

Question 12

When cross-hedging,

Accepted Answer

A) try to find one asset that has a positive correlation with another asset. 
B) the main thing is to find one asset that covaries with another asset in some predictable way. 
C) try to find one asset that has a negative correlation with another asset. 
D) none of the above 
A) try to find one asset that has a positive correlation with another asset. 
B) the main thing is to find one asset that covaries with another asset in some predictable way. 
C) try to find one asset that has a negative correlation with another asset. 
D) none of the above

Question 13

Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts)are available on the Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00.
Options (calls and puts)are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00.
For a U.S.firm to hedge a €100,000 payable,

Accepted Answer

A) buy 10 call options on the euro with a strike in dollars. 
B) buy 8 put options on the pound with a strike in dollars. 
C) sell 10 call options on the euro with a strike in dollars. 
D) sell 8 put options on the pound with a strike in dollars. 
E) both a) and b)
F)both c) and d) 
A) buy 10 call options on the euro with a strike in dollars. 
B) buy 8 put options on the pound with a strike in dollars. 
C) sell 10 call options on the euro with a strike in dollars. 
D) sell 8 put options on the pound with a strike in dollars. 
E) both a) and b)
F)both c) and d)

Question 14

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 an Italian firm to hedge a £100,000 payable,

Accepted Answer

A) buy 10 call options on the pound with a strike in euro. 
B) buy 8 put options on the euro with a strike in pounds. 
C) both a) and b) will work. 
D) simultaneously use strategies a) and b) 
E) none of the above 
A) buy 10 call options on the pound with a strike in euro. 
B) buy 8 put options on the euro with a strike in pounds. 
C) both a) and b) will work. 
D) simultaneously use strategies a) and b) 
E) none of the above

Question 15

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

Accepted Answer

A) exchange-traded futures options. 
B) currency forward contracts. 
C) foreign currency warrants. 
D) borrowing and lending in the domestic and foreign money markets. 
A) exchange-traded futures options. 
B) currency forward contracts. 
C) foreign currency warrants. 
D) borrowing and lending in the domestic and foreign money markets.

Question 16

A call option on £1,000 with a strike price of €1,250 is equivalent to

Accepted Answer

A) a put option on €1,250 with an exercise price of €1,000. 
B) a portfolio of options: a put on €1,250 with a strike price in dollars plus a call on £1,000 with a strike price in dollars. 
C) a put option on £1,000 with an exercise price of €1,250. 
D) both a) and b) 
A) a put option on €1,250 with an exercise price of €1,000. 
B) a portfolio of options: a put on €1,250 with a strike price in dollars plus a call on £1,000 with a strike price in dollars. 
C) a put option on £1,000 with an exercise price of €1,250. 
D) both a) and b)

Question 17

An exporter faced with exposure to an appreciating currency can reduce transaction exposure with a strategy of

Accepted Answer

A) paying or collecting early. 
B) paying or collecting late. 
C) paying late, collecting early. 
D) paying early, collecting late. 
A) paying or collecting early. 
B) paying or collecting late. 
C) paying late, collecting early. 
D) paying early, collecting late.

Question 18

A Japanese EXPORTER has a €1,000,000 receivable due in one year.Detail a strategy using a money market hedge that will eliminate any exchange rate risk.

Accepted Answer

A) Borrow €970,873.79 today.Convert the euro to dollars at the spot exchange rate, receive $1,165,048.54.Convert these dollars to yen at the spot rate, receive ¥. 
B) Borrow €943,396.22 today.Convert the euro to dollars at the spot exchange rate, convert these dollars to yen at the spot rate, receive ¥117,924,528.30. 
C) Lend €943,396.22 today.Convert the euro to dollars at the spot exchange rate, convert these dollars to yen at the spot rate. 
D) Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate; lend €943,396.22 at 5.25%. 
A) Borrow €970,873.79 today.Convert the euro to dollars at the spot exchange rate, receive $1,165,048.54.Convert these dollars to yen at the spot rate, receive ¥. 
B) Borrow €943,396.22 today.Convert the euro to dollars at the spot exchange rate, convert these dollars to yen at the spot rate, receive ¥117,924,528.30. 
C) Lend €943,396.22 today.Convert the euro to dollars at the spot exchange rate, convert these dollars to yen at the spot rate. 
D) Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate; lend €943,396.22 at 5.25%.

Question 19

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.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.

Accepted Answer

A) £500,000 
B) £464,874.41 
C) £446,730.77 
D) £509,900.99 
A) £500,000 
B) £464,874.41 
C) £446,730.77 
D) £509,900.99

Question 20

Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million payable in one year.The money market interest rates and foreign exchange rates are given as follows:   Assume that Boeing sells a currency forward contract of €10 million for delivery in one year,in exchange for a predetermined amount of U.S.dollar.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?

Accepted Answer

A) Boeing would have received only $14.0 million, rather than €14.6 million, had it not entered into the forward contract 
B) Boeing gained $0.6 million from forward hedging 
C) a) and b) 
D) none of the above 
A) Boeing would have received only $14.0 million, rather than €14.6 million, had it not entered into the forward contract 
B) Boeing gained $0.6 million from forward hedging 
C) a) and b) 
D) none of the above

Your U.S.firm has a £100,000 payable with a 3-month maturity.Which of the following will hedge your liability?

Transaction exposure is defined as

Generally speaking,a firm with recurrent exposure can best hedge using which product?

A CFO should be least worried about

A stock market investor would pay attention to

Your firm is bidding on a large construction contract in a foreign country.This contingent exposure could best be hedged

On a recent sale,Boeing allowed British Airways to pay either $18 million or £10 million.

When cross-hedging,

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

A call option on £1,000 with a strike price of €1,250 is equivalent to

An exporter faced with exposure to an appreciating currency can reduce transaction exposure with a strategy of

A Japanese EXPORTER has a €1,000,000 receivable due in one year.Detail a strategy using a money market hedge that will eliminate any exchange rate risk.

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

Exam 8: Management of Transaction Exposure

Your U.S.firm has a £100,000 payable with a 3-month maturity.Which of the following will hedge your liability?

Transaction exposure is defined as

Generally speaking,a firm with recurrent exposure can best hedge using which product?

A CFO should be least worried about

A stock market investor would pay attention to

Your firm is bidding on a large construction contract in a foreign country.This contingent exposure could best be hedged

On a recent sale,Boeing allowed British Airways to pay either $18 million or £10 million.

When cross-hedging,

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

A call option on £1,000 with a strike price of €1,250 is equivalent to

An exporter faced with exposure to an appreciating currency can reduce transaction exposure with a strategy of

A Japanese EXPORTER has a €1,000,000 receivable due in one year.Detail a strategy using a money market hedge that will eliminate any exchange rate risk.

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Futures and Options on Foreign Exchange

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters