A Japanese importer has a €1,000,000 payable due in one year. $\begin{array}{ccccc} \text { Spot exchange rates } & \text { 1-year Forward Rates } & {\text { Contract size }} \\ \$ 1.2 C=€ 1.00 & \$ 1.25=€ 1.0 \mathrm{C} & €62,500 \\ \$ 1.0 \mathrm{C}=¥ 100 & \$ 1.00=¥ 12 \mathrm{C} & ¥ 12,500,000 \end{array}$ 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.

A) Go short in 12 yen forward contracts.Go long in 16 euro contracts. B) Go long in 12 yen forward contracts.Go short in 16 euro contracts. C) Go short in 16 yen forward contracts.Go long in 12 euro contracts. D) none of the options A) Go short in 12 yen forward contracts.Go long in 16 euro contracts. B) Go long in 12 yen forward contracts.Go short in 16 euro contracts. C) Go short in 16 yen forward contracts.Go long in 12 euro contracts. D) none of the options

Exam 8: Management of Transaction Exposure

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.

Contract Size Country U.S. $ equiv. Currency per U.S. $ interest rates APR

£ 10,000 Britain (pound) 1.9600 £ 0.5102

12 months forward 2.0000 £ 0.5000

€ 10,000 Euro 1.5600 € 0.6410 ⁱ$ = 1%

12 months forward 1.6000 € 0.6250 ⁱ€ = 2%

SFr. 10,000 Swiss franc 0.9200 SFr. 1.0870 ⁱ£ = 3%

12 months forward 1.0000 SFr. 1.0000 ⁱSFr. = 4 4%

The following were computed without rounding.Select the answer closest to yours.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	ⁱ$ =	1%
	12 months forward	1.6000	€ 0.6250	ⁱ€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	ⁱ£ =	3%
	12 months forward	1.0000	SFr. 1.0000	ⁱSFr. = 4	4%

(Multiple Choice)

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Question 21

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.

Contract Size Country U.S. $ equiv. Currency per U.S. $ interest rates APR

£ 10,000 Britain (pound) 1.9600 £ 0.5102

12 months forward 2.0000 £ 0.5000

€ 10,000 Euro 1.5600 € 0.6410 ⁱ$ = 1%

12 months forward 1.6000 € 0.6250 ⁱ€ = 2%

SFr. 10,000 Swiss franc 0.9200 SFr. 1.0870 ⁱ£ = 3%

12 months forward 1.0000 SFr. 1.0000 ⁱSFr. = 4 4%

The following were computed without rounding.Select the answer closest to yours.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	ⁱ$ =	1%
	12 months forward	1.6000	€ 0.6250	ⁱ€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	ⁱ£ =	3%
	12 months forward	1.0000	SFr. 1.0000	ⁱSFr. = 4	4%

(Multiple Choice)

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Question 22

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

(Multiple Choice)

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Question 23

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

(Multiple Choice)

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Question 24

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

(Multiple Choice)

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Question 25

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.

U.S. $ equiv. Currency per U.S. $

Contract Size Country Tuesday Monday Tuesday Monday

£ 10,000 Britain (pound) $ 1.9600 $ 1.9400 £ 0.5102 £ 0.5155

1 months forward $ 1.9700 $ 1.9500 £ 0.5076 £ 0.5128

3 months forward $ 1.9800 $ 1.9600 £ 0.5051 £ 0.5102

6 months forward $ 1.9900 $ 1.9700 £ 0.5025 £ 0.5076

12 months forward $ 2.0000 $ 1.9800 £ 0.5000 £ 0.5051

€ 10,000 Euro $ 1.5600 $ 1.5400 € 0.6410 € 0.6494

1 months forward $ 1.5700 $ 1.5500 € 0.6369 € 0.6452

3 months forward $ 1.5800 $ 1.5600 € 0.6329 € 0.6410

6 months forward $ 1.5900 $ 1.5700 € 0.6289 € 0.6369

12 months forward $ 1.6000 $ 1.5800 € 0.6250 € 0.6329

SFr. 10,000 Swiss franc $ 0.9200 $ 0.9000 SFr. 1.0870 SFr. 1.1111

1 months forward $ 0.9400 $ 0.9200 SFr. 1.0638 SFr. 1.0870

3 months forward $ 0.9600 $ 0.9400 SFr. 1.0417 SFr. 1.0638

6 months forward $ 0.9800 $ 0.9600 SFr. 1.0204 SFr. 1.0417

12 months forward $ 1.0000 $ 0.9800 SFr. 1.0000 SFr. 1.0204

		U.S. $ equiv.	Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

(Multiple Choice)

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Question 26

Your firm is an Italian exporter of bicycles.You have sold an order to a Swiss firm for SFr.2,000,000 worth of bicycles.Payment from the customer (in Swiss francs)is due in 12 months.Use a money market hedge to redenominate this one-year franc denominated receivable into a euro-denominated receivable with a one-year maturity.

Contract Size Country U.S. $ equiv. Currency per U.S. $ interest rates APR

£ 10,000 Britain (pound) 1.9600 £ 0.5102

12 months forward 2.0000 £ 0.5000

€ 10,000 Euro 1.5600 € 0.6410 ⁱ$ = 1%

12 months forward 1.6000 € 0.6250 ⁱ€ = 2%

SFr. 10,000 Swiss franc 0.9200 SFr. 1.0870 ⁱ£ = 3%

12 months forward 1.0000 SFr. 1.0000 ⁱSFr. = 4 4%

The following were computed without rounding.Select the answer closest to yours.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	ⁱ$ =	1%
	12 months forward	1.6000	€ 0.6250	ⁱ€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	ⁱ£ =	3%
	12 months forward	1.0000	SFr. 1.0000	ⁱSFr. = 4	4%

(Multiple Choice)

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Question 27

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: The U.S. one-vear interest rate: 6.10\% per annum The euro zone one-year interest rate: 9.00\% per annum The spot exchange rate: \ 1.50/ The one-year forward exchange rate \ 1.46/ 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.dollars.Which of the following is/are true? On the maturity date of the contract Boeing will (i)have to deliver €10 million to the bank (the counter party of the forward contract). (ii)take delivery of $14.6 million (iii)have a zero net euro exposure (iv)have a profit,or a loss,depending on the future changes in the exchange rate,from this British sale.

(Multiple Choice)

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Question 28

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,

(Multiple Choice)

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Question 29

A Japanese importer has a €1,000,000 payable due in one year. Spot exchange rates 1-year Forward Rates Contract size \ 1.2C=1.00 \ 1.25=1.0 62,500 \ 1.0=¥100 \ 1.00=¥12 ¥12,500,000 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.

(Multiple Choice)

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Question 30

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.

U.S. $ equiv. Currency per U.S. $

Contract Size Country Tuesday Monday Tuesday Monday

£ 10,000 Britain (pound) $ 1.9600 $ 1.9400 £ 0.5102 £ 0.5155

1 months forward $ 1.9700 $ 1.9500 £ 0.5076 £ 0.5128

3 months forward $ 1.9800 $ 1.9600 £ 0.5051 £ 0.5102

6 months forward $ 1.9900 $ 1.9700 £ 0.5025 £ 0.5076

12 months forward $ 2.0000 $ 1.9800 £ 0.5000 £ 0.5051

€ 10,000 Euro $ 1.5600 $ 1.5400 € 0.6410 € 0.6494

1 months forward $ 1.5700 $ 1.5500 € 0.6369 € 0.6452

3 months forward $ 1.5800 $ 1.5600 € 0.6329 € 0.6410

6 months forward $ 1.5900 $ 1.5700 € 0.6289 € 0.6369

12 months forward $ 1.6000 $ 1.5800 € 0.6250 € 0.6329

SFr. 10,000 Swiss franc $ 0.9200 $ 0.9000 SFr. 1.0870 SFr. 1.1111

1 months forward $ 0.9400 $ 0.9200 SFr. 1.0638 SFr. 1.0870

3 months forward $ 0.9600 $ 0.9400 SFr. 1.0417 SFr. 1.0638

6 months forward $ 0.9800 $ 0.9600 SFr. 1.0204 SFr. 1.0417

12 months forward $ 1.0000 $ 0.9800 SFr. 1.0000 SFr. 1.0204

		U.S. $ equiv.	Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

(Multiple Choice)

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Question 31

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,

(Multiple Choice)

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Question 32

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. 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?

(Multiple Choice)

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Question 33

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

(Multiple Choice)

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Question 34

If you own a foreign currency denominated bond,you can hedge with

(Multiple Choice)

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Question 35

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

(Multiple Choice)

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Question 36

A study of Fortune 500 firms hedging practices shows that

(Multiple Choice)

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Question 37

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.

Country U.S.S equiv. Currency per U.S.$

Tuesday Monday Tuesday Monday

Britain(pound)£62,500 1.6000 1.6100 0.625 0.6211

1 Month Forward 1.6100 1.6300 0.6211 0.6173

3 Months Forward 1.6300 1.6600 0.6173 0.6024

6 Months Forward 1.6600 1.7200 0.6024 0.5814

12 Months Forward 1.7200 1.8000 0.5814 0.5556

Euro €62,500 1.2000 1.2000 0.833333 0.833333

1 Month Forward 1.2100 1.2100 0.82645 0.82645

3 Months Forward 1.2300 1.2300 0.813008 0.813008

6 Months Forward 1.2600 1.2600 0.793651 0.793651

12 Months Forward 1.2900 1.3200 0.775194 0.7575758

Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type.

Country	U.S.S equiv.	Currency per U.S.$
	Tuesday	Monday	Tuesday	Monday
Britain(pound)£62,500	1.6000	1.6100	0.625	0.6211
1 Month Forward	1.6100	1.6300	0.6211	0.6173
3 Months Forward	1.6300	1.6600	0.6173	0.6024
6 Months Forward	1.6600	1.7200	0.6024	0.5814
12 Months Forward	1.7200	1.8000	0.5814	0.5556
Euro €62,500	1.2000	1.2000	0.833333	0.833333
1 Month Forward	1.2100	1.2100	0.82645	0.82645
3 Months Forward	1.2300	1.2300	0.813008	0.813008
6 Months Forward	1.2600	1.2600	0.793651	0.793651
12 Months Forward	1.2900	1.3200	0.775194	0.7575758

(Multiple Choice)

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Question 38

If a firm faces progressive tax rates,

(Multiple Choice)

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Question 39

Contingent exposure can best be hedged with

(Multiple Choice)

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Question 40

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

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

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

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

If you own a foreign currency denominated bond,you can hedge with

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

A study of Fortune 500 firms hedging practices shows that

If a firm faces progressive tax rates,

Contingent exposure can best be hedged with

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