Deck 11: Managing Transaction Exposure

Question 1

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

Answer 1

False

Question 2

Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:

A) positive.
B) negative.
C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D) zero.

Answer 2

D

Question 3

Quasik ltd will be receiving $300,000 in 90 days. Currently, a 90-day call option with an exercise price of £0.55 and a premium of £0.01 is available. Also, a 90-day put option with an exercise price of £0.54 and a premium of £0.01 is available. Quasik plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is £0.51, what is the net amount received from the currency option hedge?

A) £150,000
B) £159,000
C) £168,000
D) £162,000

Answer 3

C

Question 4

Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is £0.47. If you use a forward hedge, you will (to the nearest £):

A) receive £750,000 today.
B) receive £750,000 in 90 days.
C) pay £1,276,595 in 90 days.
D) receive £1,276,595 in 90 days.
E) receive £282,000 in 90 days.

Question 5

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:

A) highly positive.
B) highly negative.
C) zero.
D) none of the above.

Question 6

A parallel loan means that one company takes out two different loans in two different currencies in order to hedge the transaction exposure.

Question 7

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.

A) money market
B) futures
C) forward
D) options

Question 8

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

Question 9

The hedging of a foreign currency for which no forward contract is available with a highly correlated currency for which a forward contract is available is referred to as cross-hedging.

Question 10

Assume zero transaction costs. If the 180-day forward rate is an accurate estimate of the spot rate 180 days from now, then the real cost of hedging receivables will be:

A) positive.
B) negative.
C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D) zero.

Question 11

FAB plc will need $200,000 in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of £0.57 and a premium of £0.01 is available. Also, a 90-day put option with an exercise price of £0.55 and a premium of £0.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is £0.52, what is the net amount paid, assuming FAB wishes to minimize its cost?

A) £106,000
B) £102,000
C) £116,000
D) £112,000

Question 12

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.

Question 13

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

A) receivable; purchase
B) payable; sell
C) payable; purchase
D) none of the above

Question 14

Money ltd. 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 MYR 1,500,000. The 30-day forward rate is £0.14. Furthermore, Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are £0.12 and £0.15, with probabilities of 0.30 and 0.70, respectively. Based on this information, what is the expected real cost of hedging receivables?

A) £0 hedging the same as no hedging
B) -£1,500 - hedging worthwhile
C) £1,500 - hedging not worthwhile
D) None of the above

Question 15

When a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure, such as ____.

A) leading
B) lagging
C) cross-hedging
D) currency diversification
E) all of the above

Question 16

Which of the following reflects a hedge of net receivables in British pounds by a US firm?

A) Purchase a currency put option in British pounds.
B) Sell pounds forward.
C) Borrow US dollars, convert them to pounds, and invest them in a British pound deposit.
D) A and B

Question 17

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.

Question 18

A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions.

A) forward; small
B) futures; large
C) forward; large
D) none of the above

Question 19

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

Question 20

Samesong Inc. needs 1,000,000 euros in 30 days. Samsong can earn 5 per cent annualized on a German security. The current spot rate for the euro is £0.67. Samesong can borrow funds in the UK at an annualized interest rate of 6 percent. If Samsong uses a money market hedge, how much should it borrow in the UK?

A) £652,381
B) £667,220
C) £643,396
D) £695,025

Question 21

If Lazer ltd. 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 pound by the time payment is to be made, the most appropriate hedge would be:

A) a money market hedge.
B) purchasing euro put options.
C) a forward purchase of euros.
D) purchasing euro call options.
E) selling euro call options.

Question 22

Assume that Smith plc will need to purchase $200,000 in 90 days. A call option exists on dollars with an exercise price of £0.54, a 90-day expiration date, and a premium of £0.04. A put option exists on dollars, with an exercise price of £0.54, a 90-day expiration date, and a premium of £0.03. Smith plc plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be £0.57 in 90 days. Determine the amount of pounds it will pay for the payables, including the amount paid for the option premium.

A) £116,000
B) £114,000
C) £108,000
D) £102,000
E) £100,000

Question 23

To hedge a payable position with a currency option hedge, an MNC would write a call option.

Question 24

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

A) long-term forward contract
B) currency swap
C) parallel loan
D) money market hedge

Question 25

Short-term hedging has limited effectiveness over the long run, the company should indeed take the time to:

A) engage in more hedging.
B) buy more long-term loans.
C) adjust to new price regimes.
D) all of the above.

Question 26

Use the following information to calculate the pound cost of using a money market hedge to hedge $200,000 of payables due in 360 days. Assume the firm has no excess cash. Assume the spot rate of the dollar is £0.55, the 360-day forward rate is £0.54. The British interest rate is 5%, and the US interest rate is 4% over the 360-day period.

A) £191,210
B) £196,190
C) £188,210
D) £184,761
E) None of the above

Question 27

Currency futures are very similar to forward contracts, except that they are standardized and are more appropriate for firms that prefer to hedge in smaller amounts.

Question 28

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

A) index
B) futures
C) forward
D) money market
E) currency option

Question 29

Hansel Corp. frequently uses a forward hedge to hedge its dollar payables. For the next quarter, Hansel has identified its net exposure to the dollar as being $1,000,000. The 90-day forward rate is £0.55. Furthermore, Hanson's financial centre has indicated that the possible values of the US dollar at the end of next quarter are £0.57 and £0.59, with probabilities of 0.50 and 0.50, respectively. Based on this information, what is the expected real cost of hedging payables (a minus represents a saving)?

A) £30,000
B) -£30,000
C) £1,570,000
D) -£1,580,000

Question 30

A(n) ____ involves an exchange of currencies between two parties, with a promise to reexchange currencies at a specified exchange rate and future date.

A) long-term forward contract
B) currency swap
C) parallel loan
D) interest rate swap

Question 31

When the real cost of hedging is positive, this implies that hedging was more favourable than not hedging.

Question 32

A ____ is not a technique for hedging long-term transaction exposure.

A) long-term forward contact
B) long-term futures contract
C) currency swap
D) parallel loan

Question 33

If an MNC is extremely risk-averse, it may decide to hedge even though its hedging analysis indicates that remaining unhedged will probably be less costly than hedging.

Question 34

MNCs generally do not need to hedge because shareholders can hedge their own risk.

Question 35

Samesong ltd. needs €1,000,000 in 30 days. Samesong can earn 5 percent annualized on a German security. The current spot rate for the euro is £0.67. Samesong can borrow funds in the UK at an annualized interest rate of 6 per cent. If Samesong uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?

A) £641,832
B) £680,152
C) £670,556
D) £670,000

Question 36

A put option exists on dollars with an exercise price of £0.55, a 90-day expiration date, and a premium of £0.02 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 dollar to be £0.54 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.

A) £406,000
B) £339,000
C) £364,000
D) £371,000
E) £385,000

Question 37

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.

Question 38

If a Salerno plc desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the pound by the time payment arrives, the most appropriate hedge would be:

A) a money market hedge.
B) a forward sale of yen.
C) purchasing yen call options.
D) purchasing yen put options.
E) selling yen put options.

Question 39

Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:

A) sell euros forward.
B) write euro currency put options.
C) purchase euro currency call options.
D) purchase euros forward.
E) remain unhedged.

Question 40

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.

Question 41

Which of the following techniques is used by MNCs to hedge transaction exposure?

A) Future hedge
B) Forward hedge
C) Money market hedge
D) All of the above

Question 42

If an MNC is hedging various currencies, it should measure the real cost of hedging in each currency as a dollar amount for comparison purposes.

Question 43

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

Question 44

Over-hedging means to hedge a ______ amount in a currency than the actual transaction amount and it can _____ affect a firm.

A) larger; favourably
B) smaller; favourably
C) smaller; adversely
D) larger; adversely

Question 45

Which of the following reflects a hedge of net payables on British pounds by a US firm?

A) Purchase a currency put option in British pounds.
B) Sell pounds forward.
C) Sell a currency call option in British pounds.
D) Borrow US dollars, convert them to pounds, and invest them in a British pound deposit.
E) A and B