Deck 11: Managing Transaction Exposure

Question 1

The real cost of hedging payables with a forward contract equals:

A)the dollar cost of hedging minus the dollar cost of not hedging.
B)the dollar cost of not hedging minus the dollar cost of hedging.
C)the dollar cost of hedging divided by the dollar cost of not hedging.
D)the dollar cost of not hedging divided by the dollar cost of hedging.

Answer 1

A

Question 2

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

Answer 2

A

Question 3

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:​

A)receive $750,000 today.
B)receive $750,000 in 90 days.
C)pay $750,000 in 90 days.
D)receive $480,000 today.
E)receive $480,000 in 90 days.

Answer 3

A

Question 4

If Salerno Inc. desires to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wants to be able to capitalize if the yen appreciates substantially against the dollar 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 5

Assume that Parker Co. 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 Co. uses a money market hedge, it will receive ____ in 360 days.

A)$101,904
B)$101,923
C)$98,769
D)$96,914
E)$92,307

Question 6

Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.

A)can; can
B)can; cannot
C)cannot; can
D)cannot; cannot

Question 7

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)purchase euro currency put options.
C)purchase euro currency call options.
D)purchase euros forward.
E)remain unhedged.

Question 8

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 option contract
C)parallel loan
D)money market hedge

Question 9

Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the total dollar amount received (aFter accounting for the option premium) if the firm purchases and exercises a put option:
Exercise price=$.61
Premium=$.02
Spot rate=$.60
Expected spot rate in 30 days=$.56
30-day forward rate=$.62

A)$630,000
B)$610,000
C)$600,000
D)$590,000
E)$580,000

Question 10

>From the perspective of Detroit Co., which has payables in Mexican pesos, hedging the payables is especially beneficial if the expected real cost of hedging the payables is:​

A)negative.
B)zero.
C)positive and large.
D)positive and small.

Question 11

Assume the following information:
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?
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

A)$234,000
B)$238,584
C)$240,000
D)$236,127

Question 12

Which of the following reflects a hedge of net payables in British pounds by a U.S. 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 U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
E)A and B

Question 13

An example of cross-hedging is:​

A)find two currencies that are highly positively correlated; match the payables in one currency to the receivables in the other currency.
B)use the forward market to sell forward whatever currencies you will receive.
C)use the forward market to buy forward whatever currencies you will receive.
D)B and C

Question 14

Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is $.62, and the 90-day forward rate is $.635. Kramer has developed the following probability distribution for the spot rate in 90 days:
The probability that the forward hedge will result in more dollars received than not hedging is:

A)10 percent.
B)20 percent.
C)30 percent.
D)50 percent.
E)70 percent.

Question 15

If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will ____.

A)have the same result as a call option hedge on payables
B)have the same result as a put option hedge on payables
C)have the same result as a money market hedge on payables
D)require more dollars than a money market hedge
E)A and D

Question 16

Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the NZ$ is $.50, and the 180-day forward rate is $.51. A call option on NZ$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of $.51, a premium of $.02, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days:
The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ____ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).

A)10 percent
B)30 percent
C)40 percent
D)70 percent
E)none of the above

Question 17

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____.

A)$0.
B)-$7,500.
C)$7,500.
D)none of the above

Question 18

Assume that Smith Corp. will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $.04. A put option exists on British pounds with an exercise price of $1.69, a 90-day expiration date, and a premium of $.03. Smith Corporation 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 $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium.

A)$360,000
B)$338,000
C)$332,000
D)$336,000
E)$344,000

Question 19

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.

Question 20

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:​

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 21

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 22

Quasik Corp. 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 receivables position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge?​

A)$219,000
B)$222,000
C)$216,000
D)$213,000

Question 23

Which of the following might be used to hedge exposure in the long run?​

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

Question 24

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. The spot rate of the euro in 90 days is forecasted to be $1.02. Based on this information, the expected value of the real cost of hedging payables is $____.

A)-25,000
B)25,000
C)-107,000
D)10,700

Question 25

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 26

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 27

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 28

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

A)put option
B)forward
C)call option
D)none of the above

Question 29

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

A)$144,000
B)$148,000
C)$152,000
D)$150,000

Question 30

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 31

Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Blake can borrow funds in the United States at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost of implementing the hedge?​

A)$1,000,000
B)$1,055,602
C)$1,000,830
D)$1,045,644

Question 32

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)$224,135
B)$226,269
C)$224,114
D)$223,212

Question 33

The real cost of hedging payables in Japanese yen is especially high when the yen appreciates over time.

Question 34

You are the treasurer of Arizona Corp. 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:

A)0 percent
B)80 percent
C)50 percent
D)none of the above

Question 35

Lorre Co. needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar:
The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of the Canadian dollar in 90 days is $.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging?

A)40 percent
B)60 percent
C)15 percent
D)85 percent

Question 36

If interest rate parity exists, the forward hedge will always outperform the money market hedge.

Question 37

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 38

Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the United States?​

A)$952,381
B)$995,851
C)$943,396
D)$995,025

Question 39

Exhibit 11-1

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)?
​

A)$377,115
B)$373,558
C)$363,019
D)$370,000

Question 40

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 41

A ____ is not normally used for hedging long-term transaction exposure.

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

Question 42

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 43

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 44

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.

Question 45

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.

Question 46

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.

Question 47

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 48

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 49

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

Question 50

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

Question 51

Assume zero transaction costs. If the 90-day forward rate of the euro underestimates 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.

Question 52

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 53

The exact cost of hedging with call options (as measured in the text) is not known with certainty at the time that the options are purchased.

Question 54

Many MNCs use selective hedging, in which they consider each type of transaction separately.

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

A ____ does not represent an obligation.

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

Question 60

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

Question 61

You are the treasurer of Montana Corp. 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:

A)30 percent
B)60 percent
C)20 percent
D)40 percent

Question 62

A cross-hedging strategy is most effective with currencies that are _____, whereas currency diversification is most effective with currencies that are ______.

A)highly positively correlated; not highly correlated
B)highly negatively correlated; not highly correlated
C)expected to appreciate; expected to depreciate
D)expected to depreciate; expected to appreciate

Question 63

Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that the euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:​

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

Question 64

To hedge a payables 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 United States until the payables are due.

Question 65

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

Question 66

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.

Question 67

Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that the euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:​

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

Question 68

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

Question 69

MNCs should hedge receivables using bear spreads only for currencies that are expected to appreciate substantially prior to option expiration.

Question 70

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

Question 71

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

Question 72

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

Question 73

A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.

A)the foreign currency; United States
B)the foreign currency; foreign country
C)dollars; foreign country
D)dollars; United States

Question 74

An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using options is that a premium must be paid for it.

Question 75

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

Question 76

Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is expected to depreciate.

Question 77

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

Question 78

If hedging projections cause a firm to believe that it will definitely be adversely affected by its transaction exposure, a currency option hedge is more appropriate than other methods.

Question 79

Most MNCs can completely hedge all of their transactions.

Question 80

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)?​

A)$330,000
B)$325,000
C)$320,000
D)$340,000