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) Both a and b 
A) Sell puts and buy calls 
B) Buy puts and sell calls 
C) Buy puts and buy calls 
D) Both a and b

Question 2

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 3

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 4

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 5

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,

Accepted Answer

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

Question 6

Contingent exposure can best be hedged with

Accepted Answer

A) Options. 
B) Money market hedging. 
C) Futures. 
D) All of the above 
A) Options. 
B) Money market hedging. 
C) Futures. 
D) All of the above

Question 7

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: $$\begin{array} { l l } 
\text { The U.S. one-year interest rate: } & 6.10 \% \text { per annum } \
\text { The euro zone one-year interest rate: } & 9.00 \% \text { per annum } \
\text { The spot exchange rate: } & \$ 1.50 / € \
\text { The one-year forward exchange rate: } & \$ 1.46 / €
\end{array}$$ 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

Question 8

Buying a currency option provides

Accepted Answer

A) a flexible hedge against exchange exposure. 
B) limits the downside risk while preserving the upside potential. 
C) a right, but not an obligation, to buy or sell a currency. 
D) all of the above 
A) a flexible hedge against exchange exposure. 
B) limits the downside risk while preserving the upside potential. 
C) a right, but not an obligation, to buy or sell a currency. 
D) all of the above

Question 9

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: $$\begin{array} { l l } 
\text { The U.S. one-year interest rate: } & 6.10 \% \text { per annum } \
\text { The euro zone one-year interest rate: } & 9.00 \% \text { per annum } \
\text { The spot exchange rate: } & \$ 1.50 / € \
\text { The one-year forward exchange rate: } & \$ 1.46 / €
\end{array}$$ 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

Accepted Answer

A) (i) and (iv) 
B) (ii) and (iv) 
C) (ii), (iii), and (iv) 
D) (i), (ii), and (iii) 
A) (i) and (iv) 
B) (ii) and (iv) 
C) (ii), (iii), and (iv) 
D) (i), (ii), and (iii)

Question 10

A study of Fortune 500 firms hedging practices shows that

Accepted Answer

A) over 90 percent of Fortune 500 firms use forward contracts. 
B) over 90 percent of Fortune 500 firms use options contracts. 
C) both a and b 
D) none of the above 
A) over 90 percent of Fortune 500 firms use forward contracts. 
B) over 90 percent of Fortune 500 firms use options contracts. 
C) both a and b 
D) none of the above

Question 11

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 above. 
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 above.

Question 12

A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with

Accepted Answer

A) forward contracts on the euro. 
B) forward contracts on the ruble. 
C) forward contracts on the pound. 
D) forward contracts on the yen. 
A) forward contracts on the euro. 
B) forward contracts on the ruble. 
C) forward contracts on the pound. 
D) forward contracts on the yen.

Question 13

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.

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 14

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.

Accepted Answer

A) $3,375,000 
B) $6,000,000 
C) $1,500,000 
D) $4,500,000 
A) $3,375,000 
B) $6,000,000 
C) $1,500,000 
D) $4,500,000

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

Question 16

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.

Accepted Answer

A) Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts. 
B) Go short 100 12-month pound futures contracts; and short 125 12-month euro futures contracts. 
C) Go long 100 12-month pound futures contracts; and short 125 12-month euro futures contracts. 
D) Go short 100 12-month pound futures contracts; and long 125 12-month euro futures contracts. 
E) None of the above 
A) Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts. 
B) Go short 100 12-month pound futures contracts; and short 125 12-month euro futures contracts. 
C) Go long 100 12-month pound futures contracts; and short 125 12-month euro futures contracts. 
D) Go short 100 12-month pound futures contracts; and long 125 12-month euro futures contracts. 
E) None of the above

Question 17

The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is

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 18

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.

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 19

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,

Accepted Answer

A) the firm will realize $1,145,000 on the sale net of the cost of hedging. 
B) the firm will realize $1,150,000 on the sale net of the cost of hedging. 
C) the firm will realize $1,140,000 on the sale net of the cost of hedging. 
D) none of the above 
A) the firm will realize $1,145,000 on the sale net of the cost of hedging. 
B) the firm will realize $1,150,000 on the sale net of the cost of hedging. 
C) the firm will realize $1,140,000 on the sale net of the cost of hedging. 
D) none of the above

Question 20

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.   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

Which of the following options strategies are internally consistent?

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

A stock market investor would pay attention to

Contingent exposure can best be hedged with

Buying a currency option provides

A study of Fortune 500 firms hedging practices shows that

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

A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with

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

The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is

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,

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

Which of the following options strategies are internally consistent?

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

A stock market investor would pay attention to

Contingent exposure can best be hedged with

Buying a currency option provides

A study of Fortune 500 firms hedging practices shows that

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

A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with

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

The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is

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,

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