Exam 11: Managing Transaction Exposure

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.

FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position. 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. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost?

Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?

Exhibit 11-1 -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)?

A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.

To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an MNC would buy futures.

Sometimes the overall performance of an MNC may already be insulated by offsetting effects between subsidiaries and it may not be necessary to hedge the position of each individual subsidiary.

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

Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?

Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible.

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

To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.

The tradeoff when considering alternative call options to hedge a currency position is that an MNC can obtain a call option with a higher exercise price, but would have to pay a higher premium.

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

To hedge a contingent exposure, in which an MNC's exposure is contingent on a specific event occurring, the appropriate hedge would be a(n) ____ hedge.

To hedge a receivable position with a currency option hedge, an MNC would buy a put option.

Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates: Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. If Parker Company uses a money market hedge, it will receive ____ in 360 days.

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.

In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:

To hedge a payable position in a foreign currency with a money market hedge, the MNC would borrow the foreign currency, convert it to dollars, and invest that amount in the U.S. until the payable is due.