Exam 11: Managing Transaction Exposure

Quasik Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. Quasik plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge?

Exhibit 11-1 U.S. Jordan 360 -day borrowing rate 6\% 5\% 360 -day deposit rate 5\% 4\% -Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.46. What is Pablo's cost from implementing a money market hedge (assume Pablo does not have any excess cash)?

You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future receivables of 350,000 Australian dollars (A$) 180 days from now. Put options are available for a premium of $.02 per unit and an exercise price of $.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is: Future Spot Rate Probability \ .46 20\% \ .48 30\% \ .52 50\% The 90-day forward rate of the Australian dollar is $.50. What is the probability that the put option will be exercised (assuming Arizona purchased it)?

If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the options hedge.

Since forward contracts are easy to use for hedging, any exposure to exchange rate movements should be hedged.

If a firm is hedging payables with futures contracts, it may end up paying more for the payable than it would have had it remained unhedged if the foreign currency depreciates.

Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is $.23. Furthermore, Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from hedging minus the revenue from not hedging receivables is____.

Exhibit 11-1 U.S. Jordan 360 -day borrowing rate 6\% 5\% 360 -day deposit rate 5\% 4\% -Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.50. How much will Perkins receive in 360 days from implementing a money market hedge (assume any receipts before the date of the receivable are invested)?

Assume the following information: U.S. deposit rate for 1 year = 11\% U.S. borrowing rate for 1 year = 12\% Swiss deposit rate for 1 year = 8\% Swiss borrowing rate for 1 year = 10\% Swiss forward rate for 1 year = \ .40 Swiss franc spot rate = \ .39 Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge?

When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.

U.S. deposit rate for 1 year = 11\% U.S. borrowing rate for 1 year = 12\% New Zealand deposit rate for 1 year = 8\% New Zealand borrowing rate for 1 year = 10\% New Zealand dollar forward rate for 1 year = \ .40 New Zealand dollar spot rate = \ .39 Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?

If interest rate parity exists, and transaction costs do not exist, the option hedge will yield the same results as no hedge.

A money market hedge involves taking a money market position to cover a future payables or receivables position.

When a parent company tries to convince a subsidiary to hedge its transaction exposure, this is called leading.

A put option essentially represents two swaps of currencies, one swap at the inception of the loan contract and another swap at a specified date in the future.

Hedging the position of individual subsidiaries is generally necessary, even if the overall performance of the MNC is already insulated by the offsetting positions between subsidiaries.

If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros but wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be:

Celine Co. will need €500,000 in 90 days to pay for German imports. Today's 90-day forward rate of the euro is $1.07. There is a 40 percent chance that the spot rate of the euro in 90 days will be $1.02, and a 60 percent chance that the spot rate of the euro in 90 days will be $1.09. Based on this information, the expected value of the real cost of hedging payables is $____.

When comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge is more desirable, because the cost of each hedge can be determined with certainty.

The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.