Question 1

If you owe a foreign currency denominated debt,you can hedge with

Accepted Answer

A) a long position in a currency forward contract. 
B) a long position in an exchange-traded futures option. 
C) buying the foreign currency today and investing it in the foreign county. 
D) both a and c 
A) a long position in a currency forward contract. 
B) a long position in an exchange-traded futures option. 
C) buying the foreign currency today and investing it in the foreign county. 
D) both a and c

Question 2

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. $$\begin{array}{l}
1 \text {-year rates of interest }\
\begin{array} { l l l } 
& \text { Borrowing } & \text { lending } \
\hline \text { Dollar } & 4.5 \% & 4.00 \% \
\text { Euro } & 6.00 \% & 5.25 \% \
\text { yen } & 1.00 \% & 0.75 \% \
\hline \text { Spot exchange rates } & 1 \text {-year Forward Rates } \
\hline \$ 1.25 = € 1.00 & \$ 1.2262 = € 1.00 \
\$ 1.00 = \pm 100 & \$ 1.03 = \pm 100 & \
\hline
\end{array}
\end{array}$$

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 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

A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to

Accepted Answer

A) a put option to sell $18,000 at a strike price of $1.80 = £1.00. 
B) a call option on $18,000 at a strike price of $1.80 = £1.00. 
C) a put option on £10,000 at a strike price of $1.80 = £1.00. 
D) none of the above 
A) a put option to sell $18,000 at a strike price of $1.80 = £1.00. 
B) a call option on $18,000 at a strike price of $1.80 = £1.00. 
C) a put option on £10,000 at a strike price of $1.80 = £1.00. 
D) none of the above

Question 5

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.

Accepted Answer

A) The customer essentially wants you to discount your price by the value of a put option on pounds. 
B) The customer essentially wants you to discount your price by the value of a call option on pounds. 
C) None of the above 
A) The customer essentially wants you to discount your price by the value of a put option on pounds. 
B) The customer essentially wants you to discount your price by the value of a call option on pounds. 
C) None of the above

Question 6

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

Accepted Answer

A) the $/£ exchange rate is at least $1.60/£. 
B) the $/€ exchange rate is at least $1.60/€. 
C) the €/£ exchange rate is at least €1.25/£. 
D) none of the above 
A) the $/£ exchange rate is at least $1.60/£. 
B) the $/€ exchange rate is at least $1.60/€. 
C) the €/£ exchange rate is at least €1.25/£. 
D) none of the above

Question 7

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 8

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.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 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts. 
B) Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts. 
C) Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts. 
D) Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts. 
E) None of the above 
A) Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts. 
B) Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts. 
C) Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts. 
D) Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts. 
E) None of the above

Question 9

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

Accepted Answer

A) £803,721.49 
B) €800,000 
C) £780,312.13 
D) £72,352.94 
A) £803,721.49 
B) €800,000 
C) £780,312.13 
D) £72,352.94

Question 10

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 11

Your firm is a Swiss 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.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

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 a call option on £100,000 with a strike price in euro. 
B) Buy a put option on £100,000 with a strike price in dollars. 
C) Buy a call option on £100,000 with a strike price in dollars. 
D) None of the above 
A) Buy a call option on £100,000 with a strike price in euro. 
B) Buy a put option on £100,000 with a strike price in dollars. 
C) Buy a call option on £100,000 with a strike price in dollars. 
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 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 8 put options on the pound with a strike in euro. 
C) buy 10 put options on the pound with a strike in euro. 
D) buy 8 call options on the euro with a strike in pounds. 
E) both a and b
F)both c and d 
A) buy 10 call options on the pound with a strike in euro. 
B) buy 8 put options on the pound with a strike in euro. 
C) buy 10 put options on the pound with a strike in euro. 
D) buy 8 call options on the euro with a strike in pounds. 
E) both a and b
F)both c and d

Question 14

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

Accepted Answer

A) a long position in a currency forward contract. 
B) a long position in an exchange-traded futures option. 
C) buying the foreign currency today and investing it in the foreign county. 
D) a swap contract where pay the cash flows of the bond in exchange for dollars. 
A) a long position in a currency forward contract. 
B) a long position in an exchange-traded futures option. 
C) buying the foreign currency today and investing it in the foreign county. 
D) a swap contract where pay the cash flows of the bond in exchange for dollars.

Question 15

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,

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

Question 16

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.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 euro futures contracts; and short 160 12-month SFr.futures contracts. 
B) Go long 100 12-month € futures contracts; and long 160 12-month SFr futures contracts. 
C) Go long 100 12-month euro futures contracts; and short 160 12-month Swiss Franc futures contracts. 
D) Go short 100 12-month euro futures contracts; and long 160 12-month Swiss Franc futures contracts. 
E) None of the above 
A) Go short 100 12-month euro futures contracts; and short 160 12-month SFr.futures contracts. 
B) Go long 100 12-month € futures contracts; and long 160 12-month SFr futures contracts. 
C) Go long 100 12-month euro futures contracts; and short 160 12-month Swiss Franc futures contracts. 
D) Go short 100 12-month euro futures contracts; and long 160 12-month Swiss Franc futures contracts. 
E) None of the above

Question 17

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 above 
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 above

Question 18

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.Which of the following is NOT part of a money market hedge?

Accepted Answer

A) Buy the ¥750 million at the forward exchange rate. 
B) Find the present value of ¥750 million at the Japanese interest rate. 
C) Buy that much yen at the spot exchange rate. 
D) Invest in risk-free Japanese securities with the same maturity as the accounts payable obligation. 
A) Buy the ¥750 million at the forward exchange rate. 
B) Find the present value of ¥750 million at the Japanese interest rate. 
C) Buy that much yen at the spot exchange rate. 
D) Invest in risk-free Japanese securities with the same maturity as the accounts payable obligation.

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

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.

If you owe a foreign currency denominated debt,you can hedge with

A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to

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.

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

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

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

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

Since a corporation can hedge exchange rate exposure at low cost

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.Which of the following is NOT part of a money market hedge?

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

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

If you owe a foreign currency denominated debt,you can hedge with

A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to

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.

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

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

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

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

Since a corporation can hedge exchange rate exposure at low cost

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.Which of the following is NOT part of a money market hedge?

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

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