Deck 3: International Finance: Foreign Currency Risk and Hedging Strategies

Question 1

The spot rate for the Singapore dollar is £0.320. The 30-day forward rate is £0.325. The forward rate contains an annualized __________ of ___________%.

A)discount; -18.75
B)premium; 18.75
C)discount; -18.46
D)premium; 18.46

Answer 1

premium; 18.75

Question 2

Assume that Parker Company will receive SF 200,000 in 360 days. Assume the following interest rates: UK Switzerland 360-day borrowing rate 7% 5% 360-day deposit rate 6% 4% Assume the forward rate of the Swiss franc is £0.44 and the spot rate of the Swiss franc is £0.42. If Parker Company uses a money market hedge, what equivalent amount could it receive in 360 days?

A)£101,904
B)£101,923
C)£88,769
D)£84,919

Answer 2

£84,919

Question 3

Assume that Kramer Co. will receive SF 800,000 in 90 days. Today's spot rate of the Swiss franc is £0.42, and the 90-day forward rate is £0.425. Kramer has developed the following probability distribution for the spot rate in 90 days: Possible Spot Rate in 90 Days Probability £0.41 10% £0.42 20% £0.43 40% £0.44 30% The probability that the forward hedge will result in more dollars received than not hedging is:

A)10%.
B)20%.
C)30%.
D)50%.

Answer 3

30%.

Question 4

Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the NZ$ is £0.35, and the 180-day forward rate is £0.36. A call option on NZ$ exists, with an exercise price of £0.37, a premium of £0.01, and a 180- day expiration date. A put option on NZ$ exists with an exercise price of £0.36, a premium of £0.01, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability £0.30 10% £0.35 60% £0.40 30% 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%
B)30%
C)40%
D)70%

Question 5

The potential effect of exchange rate fluctuations on foreign direct investment is expressed as _____ exposure.

A)translation
B)transaction
C)conversion
D)economic

Question 6

Which of the following is not one of the steps for currency exposure management:

A)forecast the degree of exposure
B)develop a reporting system to monitor exposure and exchange rate movements
C)buying additional foreign subsidiaries
D)assign responsibility for hedging exposure

Question 7

Operational techniques include:

A)diversification of a company's operations
B)purchasing of currency options
C)exposure netting
D)both A and C

Question 8

A(n) _____ hedge protects the company from adverse exchange rate movements but allow the company to benefit from favorable movements.

A)balance-sheet
B)forward market
C)money market
D)options market

Question 9

Which of the following are rules to use when choosing between forward contracts and currency options:

A)When the quantity of a foreign-currency cash outflow is known, buy the currency forward.
B)When the quantity of a foreign-currency cash outflow is unknown, buy the currency forward.
C)When the quantity of a foreign-currency cash flow is partially known and partially uncertain, use a forward contract to hedge the known and unknown portions.
D)When the quantity of a foreign-currency cash inflow is known, buy the currency forward.

Question 10

An American firm has just bought merchandise from a British firm for £50,000 on terms of net 90 days. The U.S. company has purchased a 3-month call option of 50,000 pounds at a strike of $1.7 per pound and premium cost of $0.02 per pound. On the day the option matures, the spot exchange rate is $1.8 per pound. Should the U.S. company exercise the option at that time or buy British pounds in the spot market?

A)exercise the option
B)buys British pound spot
C)does not make any difference
D)cannot tell

Question 11

If a firm based in the Netherlands wishes to avoid the risk of exchange rate movements, and is due to receive USD100,000 in 90 days, it could:

A)sell US dollars 90 days from now at the spot rate.
B)enter into a 90-day forward sale of US dollars for euros;
C)purchase US dollars 90 days from now at the spot rate;
D)enter into a 90-day forward purchase of US dollars for euros;

Question 12

A forward currency transaction:

A)Sets the future date when delivery of a currency must be made at an unknown spot exchange rate
B)Calls for exchange in the future of currencies at an agreed rate of exchange
C)Means that delivery and payment must be made within one business day (USA/Canada) or two business days after the transaction date
D)Is always at a premium over the spot rate

Question 13

Two important practical differences between the monetary/non-monetary method and the current rate method of translation is found in their treatment of:

A)Fixed assets and owner's equity
B)Issued share capital and retained earnings
C)Inventories and fixed assets
D)Monetary assets

Question 14

If the Indian subsidiary of a US firm has net exposed assets of Rp9,000,000 and the Indian rupee drops in value from Rp45.00/$ to Rp50.00/$, the US firm has a translation:

A)Loss of $25,000
B)Gain of $20,000
C)Loss of $20,000
D)Gain of $25,000