Exam 8: Management of Transaction Exposure

Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an American firm for $1,000,000 worth of bicycles.Payment from the American firm (in U.S.dollars)is due in six months.Detail a strategy using futures contracts that will hedge your exchange rate risk.

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

If you have a long position in a foreign currency,you can hedge with:

A Japanese EXPORTER has a €1,000,000 receivable due in one year. Estimate the cost today of an options strategy that will eliminate exchange rate risk.

Your firm is a U.K.-based importer of bicycles.You have placed an order with a Swiss firm for SFr.1,000,000 worth of bicycles.Payment (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.

A Japanese IMPORTER has a $1,250,000 PAYABLE due in one year. Detail a strategy using forward contracts that will hedge his exchange rate risk.

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

A U.S.firm has sold an Italian firm €1,000,000 worth of product.In one year the U.S.firm gets paid.To hedge,the U.S.firm bought put options on the euro with a strike price of $1.65.They paid an option premium $0.01 per euro.If at maturity,the exchange rate is $1.60,

Buying a currency option provides

An MNC seeking to reduce transaction exposure with a strategy of leading and lagging

A put option to sell $18,000 at a strike price of $1.80 = £1.00 is equivalent to

With any successful hedge

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.Which of the following is (or are)true? On the maturity date of the contract Boeing will: (i)have to deliver €10 million to the bank (the counterparty of the forward 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

If a firm faces progressive tax rates,

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 U.K.firm to hedge a €100,000 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 U.K.firm to hedge a €100,000 receivable,

Your firm has a British customer that is willing to place a $1 million order (with payment due in 6 months),but insists upon paying in pounds instead of dollars.

In evaluating the pros and cons of corporate risk management,one argument against hedging is

Your firm is an Italian importer of British 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 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 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.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.