Exam 11: Managing Transaction Exposure

Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge.

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: 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)?

Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.

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

Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is $.80. If you use a forward hedge, you will:

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.

The price at which a currency put option allows the holder to sell a currency is called the settlement price.

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.

Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option with an exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an exercise price of $.66 and a premium of $.02 is available. Mender plans to purchase options to hedge its receivables position. Assuming that the spot rate in 180 days is $.67, what is the amount received from the currency option hedge (after considering the premium paid)?

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?

A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.

Assume the following information: 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?

The ____ does not represent an obligation.

Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:

The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist: You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:

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

If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.

Most MNCs do not perceive their foreign exchange management as a profit center. Rather, their main responsibility is to assess potential exposure and determine how and if the exposure should be hedged.

You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is: The 90-day forward rate of the Japanese yen is $.01033. What is the probability that the call option will be exercised (assuming Montana purchased it)?

Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not) exercised.