Exam 8: Management of Transaction Exposure

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.

To find the swap rate for a 3-year swap, you would

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. 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.

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. 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.

The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is

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

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

Exchange rate risk of a foreign currency payable is an example of

Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00. Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00. For a U.S. firm to hedge a €100,000 receivable,

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

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 . Not dollars. Interest rates are 3% in €, 2% in $ and 4% in £. Detail a strategy using spot exchange rates and borrowing or lending that will hedge your exchange rate risk.

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. 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.

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.

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

A stock market investor would pay attention to

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

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,

A minor currency is