Deck 13: Management of Transaction Exposure

Question 1

Buying a currency options provides:

A) a flexible hedge against exchange exposure.
B) limits the downside risk while preserving the upside potential.
C) a right, but not an obligation, to buy or sell a currency.
D) all of these.

Answer 1

D

Question 2

Encana Inc,a Canadian firm has a US dollar receivable which it hedges using a forward market contract.The Canadian dollar is quoted directly.Which of the following statements is true?

A) If the spot rate is greater than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
B) If the spot rate is less than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
C) If the spot rate is equal to the forward rate at maturity, Encana is better off with the hedge than without the hedge.
D) Need more information

Answer 2

B

Question 3

Assume that Boeing sells a currency forward contract of £10 million for delivery in one year,in exchange for a given amount of U.S.dollar.Which of the following is all true?
On the maturity date of the contract Boeing will
(i)- have to deliver £10 million to the bank (the counterparty of the contract)
(ii)- take delivery of $14.6 million
(iii)- have a zero net pound exposure
(iv)- have a profit,or a loss,depending on the future changes in the exchange rate,from this British sale

A) (i) and (iv)
B) (ii) and (iv)
C) (ii), (iii), (iv)
D) (i), (ii), (iii)

Answer 3

D

Question 4

Encana Inc,a Canadian firm has a US dollar payable which it hedges using a forward market contract.The Canadian dollar is quoted directly.Which of the following statements is true?

A) If the spot rate is greater than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
B) If the spot rate is less than the forward rate at maturity, Encana is better off with the hedge than without the hedge.
C) If the spot rate is equal to the forward rate at maturity, Encana is better off with the hedge than without the hedge.
D) Need more information.

Question 5

Which of the following is a financial hedge?

A) Invoice currency selection
B) Lead/lag strategy
C) Exposure netting
D) Money market hedge

Question 6

Which hedging technique is best to use to hedge recurrent exposure?

A) Forward hedge
B) Money market hedge
C) Option hedge
D) hedging with swaps

Question 7

Assume that the forward rate is the best predictor of the future spot rate.The future dollar cost of meeting this obligation using the option hedge is:

A) $6,450,000
B) $6,545,400
C) $6,653,833
D) $6,880,734

Question 8

The future dollar cost of meeting this obligation using the forward hedge is: (Round your final answer to nearest whole dollar)

A) $6,450,000
B) $6,545,400
C) $6,653,833
D) $6,880,734

Question 9

Which hedging technique is best to use to hedge contingent exposure?

A) Forward hedge
B) Money market hedge
C) Option hedge
D) Hedging with swaps

Question 10

Transaction exposure is defined as:

A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes,
B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rates,
C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates,
D) ex post and ex ante currency exposures,

Question 11

All of the following financial contracts may be used to hedge transaction exposure:

A) forward market hedge, money market hedge, option market hedge, swap market hedge.
B) forward market hedge, capital market hedge, option market hedge, swap market hedge.
C) forward market hedge, money market hedge, option market hedge, interest rate hedge.
D) forward market hedge, capital market hedge, option market hedge, interest rate hedge.

Question 12

The most direct and popular way of hedging transaction exposure is by:

A) exchange-traded futures options.
B) currency forward contracts.
C) foreign currency warrants.
D) borrowing and lending in the domestic and foreign money markets.

Question 13

Suppose that on the maturity date of the forward contract,the spot rate turns out to be $1.40/£ (i.e.less than the forward rate of $1.46/£).Which of the following is true?

A) Boeing would have received $14.0 million, rather than $14.6 million, had it entered into the forward contract.
B) Boeing lost $0.6 million from forward hedging.
C) Boeing gained $0.6 million from forward hedging.
D) None of these.

Question 14

The future dollar cost of meeting this obligation using the money market hedge is: (Round your final answer to nearest whole dollar and don't round intermediate calculations)

A) $6,450,000
B) $6,545,400
C) $6,653,833
D) $6,880,734

Question 15

The steps involved in a money market hedge for a foreign currency receivable of a Canadian firm are in order:

A) Borrow Canadian dollars, buy foreign currency spot, invest in foreign currency T-bills, pay foreign currency receivable
B) Borrow Canadian dollars, buy foreign currency spot, invest in Canadian T-bills, collect foreign currency receivable
C) Borrow foreign currency, buy dollar spot, invest in foreign T-bills, collect foreign currency receivable
D) Borrow foreign currency, buy dollar spot, invest in Canadian T-bills, collect foreign currency receivable

Question 16

The steps involved in a money market hedge for a foreign currency payable of a Canadian firm are in order:

A) Borrow Canadian dollars, buy foreign currency spot, invest in foreign currency T-bills, pay foreign currency payable
B) Borrow Canadian dollars, buy foreign currency spot, invest in Canadian T-bills, pay foreign currency payable
C) Borrow foreign currency, buy dollar spot, invest in foreign currency T-bills, collect foreign currency proceeds
D) Borrow foreign currency, buy dollar spot, invest in Canadian T-bills, collect foreign currency proceeds

Question 17

ABC Inc.,an exporting firm,expects to earn $20 million if the dollar depreciates,but only $10 million if the dollar appreciates.Assume that the dollar has an equal chance of appreciating or depreciating.Calculate the expected tax of ABC if it is operating in a foreign country that has progressive corporate taxes as shown below: Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.

A) $3,375,000
B) $6,000,000
C) $1,500,000
D) $4,500,000

Question 18

You would like to use money market hedge to hedge your £21M A/R next year.Current spot rate is 1.7$/£,home (U.S.)risk-free interest rate is 10% and U.K.risk-free interest rate is 5%,What is your next year dollar equivalent of these A/R if you have $25M debt at 12%:

A) $37.4M
B) $37.9M
C) $38.08M
D) None of the these.

Question 19

Which of the following is not an operational hedge?

A) Invoice currency selection
B) Lead/lag strategy
C) Exposure netting
D) Money market hedge

Question 20

In evaluating the pros and cons of corporate risk management,"market imperfections" refer to:

A) information asymmetry, differential transaction costs, default costs, and progressive corporate taxes.
B) leading and lagging, receivables and payables, and diversification costs.
C) economic costs, noneconomic costs, arbitrage costs, and hedging costs.
D) management costs, corporate costs, liquidity costs, and trading costs.

Question 21

The future dollar amount of this receivable using the forward hedge is:

A) $800,000
B) $820,000
C) $836,400
D) $856,900

Question 22

Fashion Shoes Inc.manufactures its shoes in Milano,Italy.The company just received an order from the United States for USD 1 million to be received in one year.The current spot rate is EUR 1/USD and the 1 year forward rate is EUR 1.01/USD.The current interest rates are 4% in the United States and 5% in Italy.A call option on the US dollar is available with a strike price of EUR 1.01/USD and a premium of EUR 0.03 and a put option is available with a strike price of EUR 1/USD and a premium of EUR 0.025/USD.Determine the net proceeds from a forward hedge and an options hedge.Which option should Fashion Shoes use?

Question 23

Assume that the forward rate is the best predictor of the future spot rate.The expected future dollar amount of this receivable using the option hedge is:

A) $799,100
B) $800,000
C) $810,100
D) $820,000

Question 24

The future dollar amount of this receivable using the money market hedge is:

A) $780,861.2
B) $784,313.7
C) $819,607.8
D) $1,220,096

Question 25

Sonnenschein A.G.,a German retailer of solar panels just bought panels for US $100,000 to be paid in 120 days.As the financial manager,you are responsible for making a recommendation on the best hedging choice available to Sonnenschein A.G.You check with your banker and find out the following: The spot bid and ask rates are USD 1.1001/EUR and USD 1.0953/EUR respectively and the 120-day forward rates are EUR 0.8850/USD and EUR 0.8950/USD.Determine the net payables if Sonnenschein uses a forward hedge to manage its payables.

Question 26

Quebec Inc.,manufactures prefabricated houses in Quebec and sells them all over the world in local currencies.The firm has just received an order from China for renminbi 8,280,000 to be paid at delivery in 1 year.The Chinese renminbi is pegged to the US dollar at an exchange rate of 8.28 per dollar.Does Quebec Inc have a transaction exposure?

Question 27

Pile-of-Bones Inc.,headquartered in Regina,just bought snowblowers for US $100,000 to be paid in 90 days.As the financial manager,you are responsible for making a recommendation on the best hedging choice available to Pile-of-Bones Inc.You check with your banker and find out the following: The current spot rate is C$1.35/US$ and the 90-day forward rate is C$1.36/US$.The interest rates are 5% in the United States and 6% in Canada.
a)What are the net payables if Pile-of-Bones uses a forward hedge?
b)What are the net payables if Pile-of-Bones uses a money market hedge?
c)Which type of hedge should Pile-of-Bones use?

Question 28

Soleil Inc.,a French manufacturer of sunscreen,has agreed to sell sunscreen to a Danish retailer for 2 million Danish kroner to be received in 180 days.The current spot rate is DKR5.02/EUR and the 180-day forward rate is DKR5.23/EUR.The current interest rates are 5% in Denmark and 4% in France.Should the firm use a forward hedge or a money market hedge?