Question 1

From the perspective of a corporate CFO, when hedging a payable versus a receivable

Accepted Answer

A) credit risk considerations are more germane for a payable. 
B) credit risk considerations are more germane for a receivable. 
C) none of the above 
A) credit risk considerations are more germane for a payable. 
B) credit risk considerations are more germane for a receivable. 
C) none of the above

Question 2

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 3

Your firm is an Italian importer of 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. 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 4

A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail a strategy using options that will eliminate exchange rate risk.

Accepted Answer

A) Buy 16 put options on euro, sell 10 call options on yen. 
B) Buy 16 put options on euro, buy 10 call options on yen. 
C) Sell 16 call options on euro, buy 10 put options on yen. 
D) None of the above 
A) Buy 16 put options on euro, sell 10 call options on yen. 
B) Buy 16 put options on euro, buy 10 call options on yen. 
C) Sell 16 call options on euro, buy 10 put options on yen. 
D) None of the above

Question 5

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

Accepted Answer

A) information asymmetry, differential transaction costs, default costs, and progressive corporate taxes. 
B) leading and lagging, receivables and payables, and diversification costs. 
C) economic costs, noneconomic costs, arbitrage costs, and hedging costs. 
D) management costs, corporate costs, liquidity costs, and trading costs. 
A) information asymmetry, differential transaction costs, default costs, and progressive corporate taxes. 
B) leading and lagging, receivables and payables, and diversification costs. 
C) economic costs, noneconomic costs, arbitrage costs, and hedging costs. 
D) management costs, corporate costs, liquidity costs, and trading costs.

Question 6

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 7

Find the net exposure of the MNC with the following intra affiliate transactions shown.

Accepted Answer

A) $55 
B) $65 
C) $800 
D) none of the above 
A) $55 
B) $65 
C) $800 
D) none of the above

Question 8

Transaction exposure is defined as

Accepted Answer

A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. 
B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate. 
C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates. 
D) ex post and ex ante currency exposures. 
A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. 
B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate. 
C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates. 
D) ex post and ex ante currency exposures.

Question 9

A 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 above 
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 above

Question 10

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 11

An exporter can share exchange rate risk with their customers by

Accepted Answer

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

Question 12

A CFO should be least worried about

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 13

A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year.   The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using forward contract that will hedge his exchange rate risk. Have an estimate of how many contracts of what type.

Accepted Answer

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 above 
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 above

Question 14

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

Accepted Answer

A) A short position in an exchange-traded futures option 
B) A short position in a currency forward contract 
C) A short position in foreign currency warrants 
D) Borrowing (not lending) in the domestic and foreign money markets 
A) A short position in an exchange-traded futures option 
B) A short position in a currency forward contract 
C) A short position in foreign currency warrants 
D) Borrowing (not lending) in the domestic and foreign money markets

Question 15

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. Use a money market hedge to redenominate this one-year franc denominated payable into a euro-denominated payable 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

Question 16

Your firm is a Swiss importer of 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. 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 pound futures contracts; and long 200 12-month SFr. futures contracts. 
B) Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures contracts. 
C) Go short 100 12-month pound futures contracts. 
D) Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts. 
E) None of the above 
A) Go short 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts. 
B) Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures contracts. 
C) Go short 100 12-month pound futures contracts. 
D) Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts. 
E) None of the above

Question 17

If a firm faces progressive tax rates,

Accepted Answer

A) they should spread income out across time and subsidiaries. 
B) they should focus on maximizing income in one division or subsidiary. 
C) they should manage their income recognition without regard to their taxes. 
D) none of the above 
A) they should spread income out across time and subsidiaries. 
B) they should focus on maximizing income in one division or subsidiary. 
C) they should manage their income recognition without regard to their taxes. 
D) none of the above

Question 18

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.

Accepted Answer

A) Go short 12 six-month forward contracts; pay $1,290,000. 
B) Go short 16 six-month forward contracts. Pay $1,230,000. 
C) Go long 16 six-month forward contracts; raise $1,230,000. 
D) Go long 12 six-month forward contracts. Receive $1,230,000. 
A) Go short 12 six-month forward contracts; pay $1,290,000. 
B) Go short 16 six-month forward contracts. Pay $1,230,000. 
C) Go long 16 six-month forward contracts; raise $1,230,000. 
D) Go long 12 six-month forward contracts. Receive $1,230,000.

Question 19

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.

Accepted Answer

A) $20,000 
B) $5,000 
C) $12,500 
D) None of the above 
A) $20,000 
B) $5,000 
C) $12,500 
D) None of the above

Question 20

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. 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

From the perspective of a corporate CFO, when hedging a payable versus a receivable

With any hedge

A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail a strategy using options that will eliminate exchange rate risk.

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

A call option on £1,000 with a strike price of €1,250 is equivalent to

Find the net exposure of the MNC with the following intra affiliate transactions shown.

Transaction exposure is defined as

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

Since a corporation can hedge exchange rate exposure at low cost

An exporter can share exchange rate risk with their customers by

A CFO should be least worried about

A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year. The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%. Detail a strategy using forward contract that will hedge his exchange rate risk. Have an estimate of how many contracts of what type.

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

If a firm faces progressive tax rates,

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.

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

From the perspective of a corporate CFO, when hedging a payable versus a receivable

With any hedge

A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail a strategy using options that will eliminate exchange rate risk.

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

A call option on £1,000 with a strike price of €1,250 is equivalent to

Find the net exposure of the MNC with the following intra affiliate transactions shown.

Transaction exposure is defined as

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

Since a corporation can hedge exchange rate exposure at low cost

An exporter can share exchange rate risk with their customers by

A CFO should be least worried about

A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year. The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using forward contract that will hedge his exchange rate risk. Have an estimate of how many contracts of what type.

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

If a firm faces progressive tax rates,

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.

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

A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year. The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%. Detail a strategy using forward contract that will hedge his exchange rate risk. Have an estimate of how many contracts of what type.