Question 1

Suppose it is 1987 and General Motors uses a money market hedge to protect an Lit 200 million payable due in one year.The U.S.interest rate at the time of the hedge was 9% and the lira interest rate was 14%.If the spot rate moved from Lit 1293 at the start of the year to Lit 1349 at the end of the year,what was GM's cost of the money market hedge?
A)$3,647
B)$414
C)GM gained $1,069
D)GM gained $5,631

Accepted Answer

The answer of Suppose it is 1987 and General Motors...

Question 2

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
  Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the monetary/non-monetary method,what is Ajax's translation gain loss?
A)a gain of $294,000
B)a gain of $192,000
C)a loss of $174,000
D)a loss of $12,000

Accepted Answer

The answer of 
In 1995,Ajax Manufacturing's German subsidiary has the...

Question 3

A Japanese firm sells TV sets to an American importer for one billion yen payable in 90 days.To protect against exchange risk,the importer could
A)borrow yen,convert to dollars,and lend dollars for the interim period
B)sell yen on the forward market
C)sell a call option on yen
D)buy a futures contract for yen on the IMM

Accepted Answer

The answer of A Japanese firm sells TV sets to...

Question 4

Du Pont has entered into a currency risk sharing arrangement with British Gas.Under the contract,Du Pont agrees to pay British Gas a base price of $10 million for gas purchases,but the parties would share the currency risk equally beyond a neutral zone,specified as a band of exchange rates: $1.67?1.73:£1.Within the neutral zone,Du Pont must pay BG the pound equivalent of $10 million at the base rate of $1.70.Suppose the spot rate at the time of payment is £1 = $1.63.How much will Du Pont owe British Gas?
A)$10 million
B)$9,702,381
C)$9,588,235
D)$9,819,277

Accepted Answer

Since the spot rate at the time of payment is £1 = $1.63, it is below the neutral zone range of $1.67-$1.73. Therefore, Du Pont must pay the pound equivalent of $10 million at the base rate of $1.70. 
$10 million / $1.70 = £5,882,353. 
However, because the pound has depreciated against the dollar, Du Pont will owe British Gas more in dollars than they would have if the exchange rate had been within the neutral zone. 
£5,882,353 x $1.63/£1 = $9,702,381.
Therefore, the correct answer is B.

Question 5

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
  Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the temporal method,what is Ajax's translation gain loss.?
A)a gain of $294,000
B)a gain of $192,000
C)a loss of $174,000
D)a loss of $12,000

Accepted Answer

The answer of 
In 1995,Ajax Manufacturing's German subsidiary has the...

Question 6

Suppose PepsiCo hedges a ¥1 billion dividend it expects to receive from its Japanese subsidiary in 90 days with a forward contract.The current spot rate is ¥150/$1 and the 90-day forward rate is ¥149/$1.If the spot rate in 90 days is ¥154/$,how much has this forward market hedge cost PepsiCo?
A)$173,160
B)$44,743
C)Pepsi gains $173,160 from the forward contract
D)Pepsi gains $217,903 from the forward contract

Accepted Answer

The answer of Suppose PepsiCo hedges a ¥1 billion dividend...

Question 7

Which of the following is a basic hedging technique during a depreciation?
A)buy local currency forward
B)sell a local currency put option
C)reduce levels of local currency cash and marketable securities
D)loosen credit increase local currency receivables.

Accepted Answer

Reducing levels of local currency cash and marketable securities minimizes exposure to the depreciating currency, thus protecting against losses.

Question 8

If you fear the dollar will rise against the Spanish peseta,with a resulting adverse change in the dollar value of the equity of your Spanish subsidiary,you can hedge by
A)selling pesetas forward in the amount of net assets
B)buying pesetas forward in the amount of net assets
C)reducing the liabilities of the subsidiary
D)selling pesetas forward in the amount of total assets

Accepted Answer

Selling pesetas forward in the amount of net assets is a hedge against the dollar rising against the peseta. By locking in a future exchange rate, you protect the dollar value of your equity from adverse currency movements.

Question 9

Transaction gains and losses that result from adjusting assets and liabilities denominated in a currency other than the functional currency must appear on the foreign unit's income statement unless the gains or losses are attributable to
A)foreign currency transactions that are designated as an economic hedge of a net investment in a foreign entity
B)intercompany foreign-currency transactions that are of a short- term nature
C)foreign-currency transactions that involve currency speculation
D)the prospect of government intervention using currency controls

Accepted Answer

Transaction gains and losses that result from adjusting assets and liabilities denominated in a currency other than the functional currency must appear on the foreign unit's income statement. However, gains or losses attributable to foreign currency transactions that are designated as an economic hedge of a net investment in a foreign entity can be excluded and recorded as a component of other comprehensive income.

Question 10

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
  Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the current rate method,what is Ajax's translation gain loss.?
A)a gain of $294,000
B)a gain of $192,000
C)a loss of $174,000
D)a loss of $12,000

Accepted Answer

Under the current rate method, all assets and liabilities are translated at the current exchange rate. The translation gain or loss is reported in the equity section of the balance sheet as part of accumulated other comprehensive income. The specific gain or loss amount (e.g., $294,000) would depend on the changes in exchange rates and the specific amounts of assets and liabilities being translated. Without specific numbers regarding exchange rates and the values of assets and liabilities, the correct answer cannot be determined through calculation here, but the concept is that translation gains or losses reflect the impact of exchange rate changes on the company's financial statements.

Question 11

In 1993,Ford simultaneously borrows Spanish pesetas at 13% and invests dollars at 10%,both for one year.At the time Ford enters into these transactions,the spot rate for the peseta is $0.095.If the spot rate is Ptas.1 = $0.087 in one year,what is the cost to Ford of this money market hedge?
A)2.0%
B)3.8%
C)1.3%
D)Ford has a 6.5% gain,not a cost

Accepted Answer

Ford's transactions involve borrowing in pesetas and investing in dollars. The depreciation of the peseta from $0.095 to $0.087 increases the value of Ford's dollar investment relative to its peseta loan. The difference in interest rates (13% - 10% = 3%) is offset by the currency movement, resulting in a net gain rather than a cost. The specific calculation to arrive at the 6.5% gain involves considering both the interest rate differential and the change in exchange rates, showing that Ford benefits from the depreciation of the peseta against the dollar.

Question 12

Dell Computer has a £1 million receivable that it expects to collect in one year.Suppose the interest rate on pounds is 15%.How could Dell protect this receivable using a money market hedge?
A)borrow £1 million pounds today
B)lend £1 million pounds today
C)borrow £869,565 pounds today
D)lend £986,754 pounds today

Accepted Answer

To protect the receivable from fluctuations in the exchange rate, Dell can use a money market hedge. In this case, Dell will borrow £869,565 pounds today at the current interest rate of 15% for one year. After one year, Dell will receive £1 million from the receivable, which will be used to repay the loan with interest. This will ensure that Dell locks in the exchange rate and protects the value of the receivable.

Question 13

Suppose the English subsidiary of a U.S.firm had current assets of £1 million,fixed assets of £2 million and current liabilities of 1 million pounds both at the start and at the end of the year.There are no long-term liabilities.If the pound depreciated during that year from $1.50 to $1.30,the translation gain loss to be included in the parent company's equity account according to FASB #52 is
A)0 since the current assets and current liabilities cancel
B)+$200,000
C)-$250,000
D)-$400,000

Accepted Answer

The answer of Suppose the English subsidiary of a U.S.firm...

Question 14

Suppose markets are efficient,there are no taxes,and relative prices remain constant.In such a world,
A)hedging can not still be of value
B)exchange risk management remains of vital concern
C)markets are always free of inflation
D)exchange risk is nonexistent

Accepted Answer

Exchange risk management remains of vital concern even in a world where markets are efficient, there are no taxes, and relative prices remain constant. This is because exchange risk is the risk that the value of a currency will change, which can affect the value of investments and other assets. Even in a world where markets are efficient and there are no taxes, exchange rates can still fluctuate, which can lead to losses for investors.

Question 15

American Airlines hedges a £2.5 million receivable by selling pounds forward.If the spot rate is £1 = $1.73 and the 90-day forward rate is $1.7158,what is American's cost of hedging?
A)$142,000
B)$35,500
C)$8,875
D)it is unknown at the time American enters into its hedge

Accepted Answer

The answer of American Airlines hedges a £2.5 million receivable...

Question 16

Suppose the German subsidiary of a U.S.firm had current assets of €3 million,fixed assets of €6 million and current liabilities of €3 million both at the start and at the end of the year.There are no long-term liabilities.If the euro depreciated during that year from $.48 to $.38,the FASB-52 translation gain loss.to be included in the parent company's equity account is
A)0,since the current assets and current liabilities cancel
B)+$300,000
C)-$350,000
D)-$600,000

Accepted Answer

The translation loss is calculated on the net asset position. Net assets = €3 million (current assets) + €6 million (fixed assets) - €3 million (current liabilities) = €6 million. The depreciation of the euro from $0.48 to $0.38 results in a loss of $0.10 per euro. Therefore, the translation loss is €6 million * $0.10 = $600,000.

Question 17

Suppose that the spot rate and the 90-day forward rate on the pound sterling are $1.35 and $1.30,respectively.Your company,wishing to avoid foreign exchange risk,sells £500,000 forward 90 days.Assuming that the spot rate remains the same 90 days hence,your company would
A)receive £500,000 90 days hence
B)receive more than £500,000 in 90 days
C)have been better off not to have sold pounds forward
D)receive nothing

Accepted Answer

The company would have been better off not selling pounds forward because the spot rate remained the same, and they could have received more dollars per pound at the spot rate of $1.35 compared to the forward rate of $1.30.

Question 18

On March 1,1998,Bechtel submits a franc-denominated bid on a project in France.Bechtel will not learn until June 1 whether it has won the contract.What is the most appropriate way for Bechtel to manage the exchange risk on this contract?
A)sell the franc amount of the bid forward for U.S.dollars
B)buy French francs forward in the amount of the contract
C)buy a put option on francs in the amount of the franc exposure
D)sell a call option on francs in the amount of franc exposure

Accepted Answer

Buying a put option on francs allows Bechtel to hedge against the risk of the franc depreciating without obligating them to execute the option if the exchange rate moves favorably. This provides flexibility and protection against exchange rate fluctuations.

Question 19

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet:
  Suppose the DM appreciates from $0.70 to $0.76 during the period.
-Under the current/noncurrent method,what is Ajax's translation gain loss.?
A)a gain of $294,000
B)a gain of $192,000
C)a loss of $174,000
D)a loss of $12,000

Accepted Answer

The answer of 
In 1995,Ajax Manufacturing's German subsidiary has the...

Question 20

If you fear the dollar will rise against the French euro,with a resulting adverse change in the dollar value of the equity of your French subsidiary,you can hedge by
A)selling euros forward in the amount of net assets
B)buying euros forward in the amount of net assets
C)reducing the liabilities of the subsidiary
D)selling euros forward in the amount of total assets

Accepted Answer

Selling euros forward in the amount of net assets is a hedge against the risk of the dollar rising against the euro. By locking in a future exchange rate, you protect the dollar value of your French subsidiary's equity from adverse currency movements.

Quiz 10: Measuring and Managing Translation and Transaction Exposure

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: Suppose the DM appreciates from $0.70 to $0.76 during the period. -Under the monetary/non-monetary method,what is Ajax's translation gain loss?

A Japanese firm sells TV sets to an American importer for one billion yen payable in 90 days.To protect against exchange risk,the importer could

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: Suppose the DM appreciates from $0.70 to $0.76 during the period. -Under the temporal method,what is Ajax's translation gain loss.?

Suppose PepsiCo hedges a ¥1 billion dividend it expects to receive from its Japanese subsidiary in 90 days with a forward contract.The current spot rate is ¥150/$1 and the 90-day forward rate is ¥149/$1.If the spot rate in 90 days is ¥154/$,how much has this forward market hedge cost PepsiCo?

Which of the following is a basic hedging technique during a depreciation?

If you fear the dollar will rise against the Spanish peseta,with a resulting adverse change in the dollar value of the equity of your Spanish subsidiary,you can hedge by

Transaction gains and losses that result from adjusting assets and liabilities denominated in a currency other than the functional currency must appear on the foreign unit's income statement unless the gains or losses are attributable to

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: Suppose the DM appreciates from $0.70 to $0.76 during the period. -Under the current rate method,what is Ajax's translation gain loss.?

In 1993,Ford simultaneously borrows Spanish pesetas at 13% and invests dollars at 10%,both for one year.At the time Ford enters into these transactions,the spot rate for the peseta is $0.095.If the spot rate is Ptas.1 = $0.087 in one year,what is the cost to Ford of this money market hedge?

Dell Computer has a £1 million receivable that it expects to collect in one year.Suppose the interest rate on pounds is 15%.How could Dell protect this receivable using a money market hedge?

Suppose markets are efficient,there are no taxes,and relative prices remain constant.In such a world,

American Airlines hedges a £2.5 million receivable by selling pounds forward.If the spot rate is £1 = $1.73 and the 90-day forward rate is $1.7158,what is American's cost of hedging?

Suppose that the spot rate and the 90-day forward rate on the pound sterling are $1.35 and $1.30,respectively.Your company,wishing to avoid foreign exchange risk,sells £500,000 forward 90 days.Assuming that the spot rate remains the same 90 days hence,your company would

On March 1,1998,Bechtel submits a franc-denominated bid on a project in France.Bechtel will not learn until June 1 whether it has won the contract.What is the most appropriate way for Bechtel to manage the exchange risk on this contract?

In 1995,Ajax Manufacturing's German subsidiary has the following balance sheet: Suppose the DM appreciates from $0.70 to $0.76 during the period. -Under the current/noncurrent method,what is Ajax's translation gain loss.?

If you fear the dollar will rise against the French euro,with a resulting adverse change in the dollar value of the equity of your French subsidiary,you can hedge by