Question 1

Which of the following options strategies are internally consistent?

Accepted Answer

A) Sell puts and buy calls. 
B) Buy puts and sell calls. 
C) Buy puts and buy calls. 
D) Sell puts and buy calls,as well as buy puts and sell calls. 
A) Sell puts and buy calls. 
B) Buy puts and sell calls. 
C) Buy puts and buy calls. 
D) Sell puts and buy calls,as well as buy puts and sell calls.

Question 2

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

Accepted Answer

A) the forward price is the same for the swap contract but not for the forward contracts. 
B) the swap contract will have daily resettlement. 
C) the forward contracts will have resettlement risk. 
D) none of the options 
A) the forward price is the same for the swap contract but not for the forward contracts. 
B) the swap contract will have daily resettlement. 
C) the forward contracts will have resettlement risk. 
D) none of the options

Question 3

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. $\begin{array}{|c|c|c|r|r|}
\hline \text { Country } & {\text { U.S.\$ equiv. }} && \text { Currency per U.S.\$ } \
\hline & \text { Tuesday } & \text { Monday } & \text { Tuesday } & \text { Monday } \

\hline \text { Britain(pound) } ? 62,500 & 1.6000 & 1.6100 & 0.625 & 0.6211 \
\hline \text { 1 Month Forward } & 1.6100 & 1.6300 & 0.3211 & 0.6173 \
\hline \text { 3 Months Forward } & 1.6300 & 1.6600 & 0.6173& 0.6024 \
\hline \text { 6 Months Forward } & 1.6600 & 1.7200 & 0.6024 & 0.5814 \
\hline \text { 12 Months Forward } & 1.7200 & 1.8000 & 0.5814 & 0.5556 \
\hline
\end{array}$

Accepted Answer

A) Go short 12 six-month forward contracts; pay $1,630,000. 
B) Go short 16 six-month forward contracts; pay $1,630,000. 
C) Go long 16 six-month forward contracts; raise $1,660,000. 
D) Go long 12 six-month forward contracts; receive $1,660,000. 
A) Go short 12 six-month forward contracts; pay $1,630,000. 
B) Go short 16 six-month forward contracts; pay $1,630,000. 
C) Go long 16 six-month forward contracts; raise $1,660,000. 
D) Go long 12 six-month forward contracts; receive $1,660,000.

Question 4

A Japanese exporter has a €1,000,000 receivable due in one year.Spot and forward exchange rate data is given: $\begin{array}{rlr}
Spot exchange rates&1 \text {-year Forward Rates } & \text { Contracts1ze } \
 \$ 1.20=€ 1.00&\$ 1.25=€ 1.0 C & €  62,500\
 \$ 1.00=€ 1.00&\$ 1.00=¥ 12 C & ¥ 12,500,000
\end{array}$ The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%.Detail a strategy using forward contracts

Accepted Answer

A) Borrow €970,873.79 today; in one year you owe €1m,which will be financed with the receivable.Convert €970,873.79 to dollars at spot,receive $1,165,048.54.Convert dollars to yen at spot,receive ¥116,504,854. 
B) Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1.Buy ¥150,000,000 forward using 11.52 contracts,at the forward rate of $1.00 = ¥120. 
C) Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1.Buy ¥150,000,000 forward using 12 contracts,at the forward rate of $1.00 = ¥120. 
D) none of the options 
A) Borrow €970,873.79 today; in one year you owe €1m,which will be financed with the receivable.Convert €970,873.79 to dollars at spot,receive $1,165,048.54.Convert dollars to yen at spot,receive ¥116,504,854. 
B) Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1.Buy ¥150,000,000 forward using 11.52 contracts,at the forward rate of $1.00 = ¥120. 
C) Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1.Buy ¥150,000,000 forward using 12 contracts,at the forward rate of $1.00 = ¥120. 
D) none of the options

Question 5

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.             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.

Accepted Answer

A) €1,225,490.20 
B) €1,244,212.10 
C) €1,250,000 
D) €1,219,815.78 
A) €1,225,490.20 
B) €1,244,212.10 
C) €1,250,000 
D) €1,219,815.78

Question 6

The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is

Accepted Answer

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

Question 7

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 with put and call options on the foreign currency,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 with put and call options on the foreign currency,depending upon the specifics ("the rest of the story"). 
D) with futures contracts.

Question 8

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 forward hedge is

Accepted Answer

A) $6,450,000. 
B) $6,545,400. 
C) $6,653,833. 
D) $6,880,734. 
A) $6,450,000. 
B) $6,545,400. 
C) $6,653,833. 
D) $6,880,734.

Question 9

Since a corporation can hedge exchange rate exposure at low cost

Accepted Answer

A) there is no benefit to the shareholders in an efficient market. 
B) shareholders would benefit from the risk reduction that hedging offers. 
C) the corporation's banker would benefit from the risk reduction that hedging offers. 
D) none of the options 
A) there is no benefit to the shareholders in an efficient market. 
B) shareholders would benefit from the risk reduction that hedging offers. 
C) the corporation's banker would benefit from the risk reduction that hedging offers. 
D) none of the options

Question 10

An exporter faced with exposure to a depreciating 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 11

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

Accepted Answer

A) $6,450,000. 
B) $6,545,400. 
C) $6,653,833. 
D) $6,880,734. 
A) $6,450,000. 
B) $6,545,400. 
C) $6,653,833. 
D) $6,880,734.

Question 12

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

Accepted Answer

A) can probably employ the strategy more effectively with intra firm payables and receivables than with customers or outside suppliers. 
B) can employ the strategy most easily with customers,regardless of market structure. 
C) can employ the strategy most easily with suppliers,regardless of market structure. 
D) none of the options 
A) can probably employ the strategy more effectively with intra firm payables and receivables than with customers or outside suppliers. 
B) can employ the strategy most easily with customers,regardless of market structure. 
C) can employ the strategy most easily with suppliers,regardless of market structure. 
D) none of the options

Question 13

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,

Accepted Answer

A) buy 10 call options on the pound with a strike in euro. 
B) buy 10 put options on the pound with a strike in euro. 
C) buy 8 call options on the euro with a strike in pounds. 
D) buy 10 put options on the pound with a strike in euro and buy 8 call options on the euro with a strike in pounds. 
A) buy 10 call options on the pound with a strike in euro. 
B) buy 10 put options on the pound with a strike in euro. 
C) buy 8 call options on the euro with a strike in pounds. 
D) buy 10 put options on the pound with a strike in euro and buy 8 call options on the euro with a strike in pounds.

Question 14

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

Accepted Answer

A) if the corporate guys were good at forecasting exchange rates,they would make more money on Wall Street,so only incompetent managers are left at corporations to hedge. 
B) shareholders who are diversified have already managed their exchange rate risk. 
C) the hedging costs go into someone else's pocket. 
D) none of the options 
A) if the corporate guys were good at forecasting exchange rates,they would make more money on Wall Street,so only incompetent managers are left at corporations to hedge. 
B) shareholders who are diversified have already managed their exchange rate risk. 
C) the hedging costs go into someone else's pocket. 
D) none of the options

Question 15

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 options 
A) Options 
B) Swaps 
C) Futures 
D) all of the options

Question 16

With any hedge,

Accepted Answer

A) your losses on one side should about equal your gains on the other side. 
B) you should try to make money on both sides of the transaction; that way you make money coming and going. 
C) you should spend at least as much time working the hedge as working the underlying deal itself. 
D) you should agree to anything your banker puts in front of your face. 
A) your losses on one side should about equal your gains on the other side. 
B) you should try to make money on both sides of the transaction; that way you make money coming and going. 
C) you should spend at least as much time working the hedge as working the underlying deal itself. 
D) you should agree to anything your banker puts in front of your face.

Question 17

An exporter can shift exchange rate risk to their customers by

Accepted Answer

A) invoicing in their home currency. 
B) invoicing in their customer's local currency. 
C) splitting the difference,and invoicing half of sales in local currency and half of sales in home currency. 
D) invoicing sales in a currency basket such as the SDR as the invoice currency. 
A) invoicing in their home currency. 
B) invoicing in their customer's local currency. 
C) splitting the difference,and invoicing half of sales in local currency and half of sales in home currency. 
D) invoicing sales in a currency basket such as the SDR as the invoice currency.

Question 18

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 options 
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 options

Question 19

With respect to information asymmetry,

Accepted Answer

A) management knows about the firm's exposure position much better than stockholders,and therefore should be the ones to manage exchange exposure. 
B) stockholders know about the firm's exposure position much better than management,and therefore should be the ones to manage exchange exposure. 
C) regulators know about the firm's exposure position much better than management,and therefore should be the ones to oversee exchange exposure. 
D) none of the options 
A) management knows about the firm's exposure position much better than stockholders,and therefore should be the ones to manage exchange exposure. 
B) stockholders know about the firm's exposure position much better than management,and therefore should be the ones to manage exchange exposure. 
C) regulators know about the firm's exposure position much better than management,and therefore should be the ones to oversee exchange exposure. 
D) none of the options

Question 20

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.Interest rates are 3 percent in €,2 percent in $ and 4 percent in £.              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       0.757575       Detail a strategy using spot exchange rates and borrowing or lending that will hedge your exchange rate risk.

Accepted Answer

A) Borrow €970,873.79 in one year you owe €1m,which will be financed with the receivable.Convert €970,873.79 to dollars at spot,receive $1,165,048.54.Convert dollars to pounds at spot,receive £728,155.34. 
B) Sell €1m forward using 16 contracts at $1.20 per €1.Buy £750,000 forward using 12 contracts at $1.60 per £1. 
C) Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.Buy £750,000 forward using 12 contracts at the forward rate of $1.72 per £1. 
D) none of the options 
A) Borrow €970,873.79 in one year you owe €1m,which will be financed with the receivable.Convert €970,873.79 to dollars at spot,receive $1,165,048.54.Convert dollars to pounds at spot,receive £728,155.34. 
B) Sell €1m forward using 16 contracts at $1.20 per €1.Buy £750,000 forward using 12 contracts at $1.60 per £1. 
C) Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.Buy £750,000 forward using 12 contracts at the forward rate of $1.72 per £1. 
D) none of the options

Which of the following options strategies are internally consistent?

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

The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is

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

Since a corporation can hedge exchange rate exposure at low cost

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

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

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

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

With any hedge,

An exporter can shift exchange rate risk to their customers by

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

With respect to information asymmetry,

International Monetary System

Globalization and the Multinational Firm

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

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%

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	0.757575

Exam 8: Management of Transaction Exposure

Which of the following options strategies are internally consistent?

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

The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is

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

Since a corporation can hedge exchange rate exposure at low cost

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

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

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

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

With any hedge,

An exporter can shift exchange rate risk to their customers by

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

With respect to information asymmetry,

International Monetary System

Globalization and the Multinational Firm

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