Deck 4: Currency Derivatives, Translation and Transaction Exposure

Question 1

Gulf Air 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 Gulf Air's cost of hedging?

A) $142,000
B) $35,500
C) $8,875
D) it is unknown at the time Gulf Air enters into its hedge

Answer 1

it is unknown at the time Gulf Air enters into its hedge

Question 2

Suppose the British subsidiary of a Eurozone firm had current assets of £1 million, fixed assets of £2 million and current liabilities of £1 million both at the start and at the end of the year. There are no long term liabilities. Which of the following is correct? If the British 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 using IFRS is

A) 0 since the current assets and current liabilities cancel
B) +€200,000
C) -€250,000
D) -€400,000

Answer 2

-€400,000

Question 3

Which of the following is correct? If you fear the U.S. dollar will rise against the 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

Answer 3

selling euros forward in the amount of net assets

Question 4

Siemens had operations in both Malaysia and Thailand. In the past the Malaysian ringgit and Thai baht were highly correlated in their movements against the euro. Which of the following is correct? If the Malaysian unit has net inflows of ringgit and the Thai unit has net inflows of baht, then Siemens' combined transaction exposure

A) approximately equals the sum of its ringgit and baht exposures
B) is less than the sum of its ringgit and baht exposures because the currencies are highly correlated
C) is less than the sum of its ringgit and baht exposures because of diversification between the company's subsidiaries
D) is not significant due to the highly correlated nature of the two currencies

Question 5

Suppose the current spot rate for the Australian dollar is U.S.$0.8321. Which of the following is correct? The intrinsic value of an A$50,000 call option with an exercise price of U.S.$0.8195 is

A) $0
B) $630
C) $740
D) $2,340

Question 6

The current spot rate for the MYR is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the time value of one MYR 62,500 call option?

A) $2,331.25
B) $1,562.50
C) $950.00
D) $768.75

Question 7

The current spot rate for the MYR is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the intrinsic value of one MYR 62,500 call option?

A) $2,331.25
B) $1,562.50
C) $950.00
D) $768.75

Question 8

The current spot rate for the MYR is $0.5883. The put premium on a call option with an exercise price of $0.5925 is $0.0242. What is the time value of one MYR 62,500 put option?

A) $1,775.00
B) $1,512.50
C) $1,250.00
D) $262.50