Deck 8: Management of Transaction Exposure

Question 1

The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is

A)transaction exposure.
B)translation exposure.
C)economic exposure.
D)none of the options

Answer 1

A

Question 2

A stock market investor would pay attention to

A)anticipated changes in exchange rates that have been already discounted and reflected in the firm's value.
B)unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value.
C)anticipated changes in exchange rates that have been already discounted and reflected in the firm's value,as well as unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value.
D)none of the options

Answer 2

A

Question 3

With any successful hedge,

A)you are guaranteed to lose money on one side.
B)you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
C)you are guaranteed to lose money on one side,but you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
D)none of the options

Answer 3

D

Question 4

If you own a foreign currency denominated bond,you can hedge with

A)a long position in a currency forward contract.
B)a long position in an exchange-traded futures option.
C)buying the foreign currency today and investing it in the foreign county.
D)a swap contract where pay the cash flows of the bond in exchange for dollars.

Question 5

With any hedge,

A)your losses on one side should about equal your gains on the other side.
B)you should try to make money on both sides of the transaction; that way you make money coming and going.
C)you should spend at least as much time working the hedge as working the underlying deal itself.
D)you should agree to anything your banker puts in front of your face.

Question 6

A CFO should be least worried about

A)transaction exposure.
B)translation exposure.
C)economic exposure.
D)none of the options

Question 7

Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million payable in one year.The money market interest rates and foreign exchange rates are given as follows: $\begin{array}{ll}\text { The U.S. one-vear interest rate: } & 6.10 \% \text { per annum } \\\text { The euro zone one-year interest rate: } & 9.00 \% \text { per annum } \\\text { The spot exchange rate: } & \$ 1.50/€ \\\text { The one-year forward exchange rate } & \$ 1.46 /€\end{array}$ Assume that Boeing sells a currency forward contract of €10 million for delivery in one year,in exchange for a predetermined amount of U.S.dollars.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 only $14.0 million,rather than $14.6 million,had it not entered into the forward contract.
B)Boeing gained $0.6 million from forward hedging.
C)Boeing would have received only $14.0 million,rather than $14.6 million,had it not entered into the forward contract.Additionally,Boeing gained $0.6 million from forward hedging.
D)none of the options

Question 8

A Japanese exporter has a €1,000,000 receivable due in one year.Spot and forward exchange rate data is given: $\begin{array}{rlr}Spot exchange rates&1 \text {-year Forward Rates } & \text { Contracts1ze } \\ \$ 1.20=€ 1.00&\$ 1.25=€ 1.0 C & € 62,500\\ \$ 1.00=€ 1.00&\$ 1.00=¥ 12 C & ¥ 12,500,000\end{array}$ The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%.Detail a strategy using forward contracts

A)Borrow €970,873.79 today; in one year you owe €1m,which will be financed with the receivable.Convert €970,873.79 to dollars at spot,receive $1,165,048.54.Convert dollars to yen at spot,receive ¥116,504,854.
B)Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1.Buy ¥150,000,000 forward using 11.52 contracts,at the forward rate of $1.00 = ¥120.
C)Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1.Buy ¥150,000,000 forward using 12 contracts,at the forward rate of $1.00 = ¥120.
D)none of the options

Question 9

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 10

The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is

A)transaction exposure.
B)translation exposure.
C)economic exposure.
D)none of the options

Question 11

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 rate.
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 12

Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an Italian firm for €1,000,000 worth of bicycles.Payment from the Italian firm (in €)is due in twelve months.Your firm wants to hedge the receivable into pounds.Not dollars.Use the following table for exchange rate data.

Country	U.S.S equiv.		Currency per U.S.$
	Tuesday	Monday	Tuesday	Monday
Britain(pound)£62,500	1.6000	1.6100	0.625	0.6211
1 Month Forward	1.6100	1.6300	0.6211	0.6173
3 Months Forward	1.6300	1.6600	0.6173	0.6024
6 Months Forward	1.6600	1.7200	0.6024	0.5814
12 Months Forward	1.7200	1.8000	0.5814	0.5556
Euro €62,500	1.2000	1.2000	0.833333	0.833333
1 Month Forward	1.2100	1.2100	0.82645	0.82645
3 Months Forward	1.2300	1.2300	0.813008	0.813008
6 Months Forward	1.2600	1.2600	0.793651	0.793651
12 Months Forward	1.2900	1.3200	0.775194	0.7575758

Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type.

A)Borrow €970,873.79 in one year you owe €1m,which will be financed with the receivable.Convert €970,873.79 to dollars at spot,receive $1,165,048.54.Convert dollars to pounds at spot,receive £728,155.34.
B)Sell €1m forward using 16 contracts at $1.20 per €1.Buy £750,000 forward using 12 contracts at $1.60 per £1.
C)Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.
D)Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.Buy £750,000 forward using 12 contracts at the forward rate of $1.72 per £1.

Question 13

If you owe a foreign currency denominated debt,you can hedge with

A)a long position in a currency forward contract.
B)a long position in an exchange-traded futures option.
C)buying the foreign currency today and investing it in the foreign county.
D)a long position in a currency forward contract,or buying the foreign currency today and investing it in the foreign county.

Question 14

The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is

A)transaction exposure.
B)translation exposure.
C)economic exposure.
D)none of the options

Question 15

Exchange rate risk of a foreign currency payable is an example of

A)transaction exposure.
B)translation exposure.
C)economic exposure.
D)none of the options

Question 16

If you have a long position in a foreign currency,you can hedge with

A)a short position in an exchange-traded futures option.
B)a short position in a currency forward contract.
C)a short position in foreign currency warrants.
D)borrowing (not lending)in the domestic and foreign money markets.

Question 17

Your firm has a British customer that is willing to place a $1 million order,but wants to pay in pounds instead of dollars.The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00.The lead time on the order is such that payment is due in one year.What is the fairest exchange rate to use?

A)$1.85 = £1.00
B)$1.8750 = £1.00
C)$1.90 = £1.00
D)none of the options

Question 18

Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million payable in one year.The money market interest rates and foreign exchange rates are given as follows: $\begin{array}{ll}\text { The U.S. one-vear interest rate: } & 6.10 \% \text { per annum } \\\text { The euro zone one-year interest rate: } & 9.00 \% \text { per annum } \\\text { The spot exchange rate: } & \$ 1.50/€ \\\text { The one-year forward exchange rate } & \$ 1.46 /€\end{array}$ Assume that Boeing sells a currency forward contract of €10 million for delivery in one year,in exchange for a predetermined amount of U.S.dollars.Which of the following is/are true? On the maturity date of the contract Boeing will
(i)have to deliver €10 million to the bank (the counter party of the forward contract).
(ii)take delivery of $14.6 million
(iii)have a zero net euro 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),and (iv)
D)(i),(ii),and (iii)

Question 19

The choice between a forward market hedge and a money market hedge often comes down to

A)interest rate parity.
B)option pricing.
C)flexibility and availability.
D)none of the options

Question 20

Since a corporation can hedge exchange rate exposure at low cost

A)there is no benefit to the shareholders in an efficient market.
B)shareholders would benefit from the risk reduction that hedging offers.
C)the corporation's banker would benefit from the risk reduction that hedging offers.
D)none of the options

Question 21

Your firm is a Swiss exporter of bicycles.You have sold an order to a British firm for £1,000,000 worth of bicycles.Payment from the British firm (in pounds sterling)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go short 100 12-month pound futures contracts; and long 200 12-month SFr.futures contracts.
B)Go long 100 12-month pound futures contracts; and short 200 12-month SFr.futures contracts.
C)Go short 100 12-month pound futures contracts; and short 200 12-month SFr.futures contracts.
D)Go long 100 12-month pound futures contracts; and long 200 12-month SFr.futures contracts.
E)none of the options

Question 22

Your firm is a U.S.-based exporter of bicycles.You have sold an order to a French firm for €1,000,000 worth of bicycles.Payment from the French firm (in euro)is due in three months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and how much (in $)your firm will have. $\begin{array}{|c|c|c|r|r|}\hline \text { Country } & {\text { U.S.\$ equiv. }} && \text { Currency per U.S.\$ } \\\hline & \text { Tuesday } & \text { Monday } & \text { Tuesday } & \text { Monday } \\\hline \text { Britain(pound) } ? 62,500 & 1.6000 & 1.6100 & 0.625 & 0.6211 \\\hline \text { 1 Month Forward } & 1.6100 & 1.6300 & 0.3211 & 0.6173 \\\hline \text { 3 Months Forward } & 1.6300 & 1.6600 & 0.6173& 0.6024 \\\hline \text { 6 Months Forward } & 1.6600 & 1.7200 & 0.6024 & 0.5814 \\\hline \text { 12 Months Forward } & 1.7200 & 1.8000 & 0.5814 & 0.5556 \\\hline\end{array}$

A)Go short 12 six-month forward contracts; pay $1,630,000.
B)Go short 16 six-month forward contracts; pay $1,630,000.
C)Go long 16 six-month forward contracts; raise $1,660,000.
D)Go long 12 six-month forward contracts; receive $1,660,000.

Question 23

Your firm is a U.K.-based exporter of bicycles.You have sold an order to a Swiss firm for SFr.1,000,000 worth of bicycles.Payment from the Swiss firm (in Swiss francs)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.
B)Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.
C)Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.
D)Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.
E)none of the options

Question 24

Your firm is an Italian exporter of bicycles.You have sold an order to a Swiss firm for SFr.2,000,000 worth of bicycles.Payment from the customer (in Swiss francs)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.
B)Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.
C)Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.
D)Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.
E)none of the options

Question 25

Your firm is an Italian exporter of bicycles.You have sold an order to a British firm for £1,000,000 worth of bicycles.Payment from the customer (in pounds sterling)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.
B)Go short 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.
C)Go long 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.
D)Go short 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.
E)none of the options

Question 26

Your firm is a U.K.-based importer of bicycles.You have placed an order with an Italian firm for €1,000,000 worth of bicycles.Payment (in euro)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a pound-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)£803,721.49
B)€800,000
C)£780,312.13
D)£72,352.94

Question 27

Your firm is a Swiss importer of bicycles.You have placed an order with an Italian firm for €1,000,000 worth of bicycles.Payment (in euro)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a Swiss franc-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)SFr.1,728,900.26
B)SFr.1,600,000
C)SFr.1,544,705.88
D)SFr.800,000

Question 28

Your firm is a Swiss exporter of bicycles.You have sold an order to a French firm for €1,000,000 worth of bicycles.Payment from the French firm (in euro)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a Swiss franc-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)SFr.1,728,900.26
B)SFr.1,600,000
C)SFr.1,544,705.88
D)SFr.800,000

Question 29

Your firm is a Swiss exporter of bicycles.You have sold an order to a French firm for €1,000,000 worth of bicycles.Payment from the French firm (in euro)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go short 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures contracts.
B)Go long 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures contracts.
C)Go long 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures contracts.
D)Go short 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures contracts.
E)none of the options

Question 30

Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an American firm for $1,000,000 worth of bicycles.Payment from the American firm (in U.S.dollars)is due in six months.Detail a strategy using futures contracts that will hedge your exchange rate risk. $\begin{array}{|c|c|c|r|r|}\hline \text { Country } & {\text { U.S.\$ equiv. }} && \text { Currency per U.S.\$ } \\\hline & \text { Tuesday } & \text { Monday } & \text { Tuesday } & \text { Monday } \\\hline \text { Britain(pound) } ? 62,500 & 1.8000 & 1.8100 & 0.5556 & 0.5525 \\\hline \text { 1 Month Forward } & 1.8100 & 1.8300 & 0.5525 & 0.5464 \\\hline \text { 3 Months Forward } & 1.8300 & 1.8600 & 0.5464 & 0.5376 \\\hline \text { 6 Months Forward } & 1.8600 & 1.8200 & 0.5376 & 0.5495 \\\hline \text { 12 Months Forward } & 1.8200 & 1.8000 & 0.5495 & 0.5556 \\\hline\end{array}$

A)Go short 12 six-month forward contracts; pay £555,600.
B)Go short 16 six-month forward contracts.Pay approximately £537,600.
C)Go long 12 six-month forward contracts.Receive approximately £549,500.
D)Go long 16 six-month forward contracts; raise approximately £537,600.

Question 31

Your firm is a U.K.-based exporter of bicycles.You have sold an order to a French firm for €1,000,000 worth of bicycles.Payment from the French firm (in euro)is due in 12 months.Use a money market hedge to redenominated this one-year receivable into a pound-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)£803,721.49
B)€800,000
C)£780,312.13
D)£72,352.94

Question 32

Your firm is an Italian importer of bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.
B)Go short 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.
C)Go long 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.
D)Go short 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.
E)none of the options

Question 33

Your firm is a U.K.-based importer of bicycles.You have placed an order with a Swiss firm for SFr.1,000,000 worth of bicycles.Payment (in Swiss francs)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.
B)Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.
C)Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.
D)Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.
E)none of the options

Question 34

Your firm is an Italian importer of bicycles.You have placed an order with a Swiss firm for SFr.2,000,000 worth of bicycles.Payment (in francs)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.
B)Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.
C)Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.
D)Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.
E)none of the options

Question 35

Your firm is a Swiss importer of bicycles.You have placed an order with an Italian firm for €1,000,000 worth of bicycles.Payment (in euro)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go short 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures contracts.
B)Go long 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures contracts.
C)Go long 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures contracts.
D)Go short 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures contracts.
E)none of the options

Question 36

Your firm is a U.K.-based exporter of bicycles.You have sold an order to a French firm for €1,000,000 worth of bicycles.Payment from the French firm (in euro)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
B)Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
C)Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
D)Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
E)none of the options

Question 37

Your firm is a Swiss importer of bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go short 100 12-month pound futures contracts; and long 200 12-month SFr.futures contracts.
B)Go long 100 12-month pound futures contracts; and short 200 12-month SFr.futures contracts.
C)Go short 100 12-month pound futures contracts.
D)Go long 100 12-month pound futures contracts; and long 200 12-month SFr.futures contracts.
E)none of the options

Question 38

Your firm has a British customer that is willing to place a $1 million order (with payment due in 6 months),but insists upon paying in pounds instead of dollars.

A)The customer essentially wants you to discount your price by the value of a put option on pounds.
B)The customer essentially wants you to discount your price by the value of a call option on pounds.
C)The customer essentially wants you to discount your price by the sum of the values of a call and put option on pounds.
D)none of the options

Question 39

Your firm is a U.K.-based importer of bicycles.You have placed an order with an Italian firm for €1,000,000 worth of bicycles.Payment (in euro)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

A)Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
B)Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
C)Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
D)Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
E)none of the options

Question 40

Your firm is an Italian exporter of bicycles.You have sold an order to a British firm for £1,000,000 worth of bicycles.Payment from the customer (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)€1,225,490.20
B)€1,244,212.10
C)€1,250,000
D)€1,219,815.78

Question 41

Buying a currency option 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 the options

Question 42

Your firm is a U.K.-based importer of bicycles.You have placed an order with a Swiss firm for SFr.1,000,000 worth of bicycles.Payment (in Swiss francs)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)£500,000
B)£464,874.41
C)£446,730.77
D)£509,900.99

Question 43

A Japanese exporter has a €1,000,000 receivable due in one year.Estimate the cost today of an options strategy that will eliminate exchange rate risk. $\begin{array}{llll}\text { Listed Options }\\&\text { Strike } & \text { Puts } &\text { Calls } \\\text { Euro€62,500 } & \$ 1.25=€ 1.0 C & \$ 0.0075 \text { per } € & \$ 0.01^{ per€ } \\\text { Yen?12,500,000 } & \$ 1.00=¥ 10 C & \$ 0.0075 \text { per } ¥ 100 & 0.010^{ per ¥10 }\end{array}$

A)$20,000
B)$5,000
C)$12,500
D)none of the options

Question 44

Your firm is a Swiss importer of bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year pound denominated payable into a Swiss franc-denominated payable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)SFr.2,000,000
B)SFr.2,151,118.62
C)SFr.2,068,383.28
D)SFr.1,921,941.75

Question 45

A Japanese importer has a €1,000,000 payable due in one year. $\begin{array}{ccccc}\text { Spot exchange rates } & \text { 1-year Forward Rates } & {\text { Contract size }} \\\$ 1.2 C=€ 1.00 & \$ 1.25=€ 1.0 \mathrm{C} & €62,500 \\\$ 1.0 \mathrm{C}=¥ 100 & \$ 1.00=¥ 12 \mathrm{C} & ¥ 12,500,000\end{array}$ The one-year risk free rates are i_$ = 4.03%; i_€ = 6.05%; and i_¥ = 1%.Detail a strategy using forward contracts that will hedge his exchange rate risk.Have an estimate of how many contracts of what type.

A)Go short in 12 yen forward contracts.Go long in 16 euro contracts.
B)Go long in 12 yen forward contracts.Go short in 16 euro contracts.
C)Go short in 16 yen forward contracts.Go long in 12 euro contracts.
D)none of the options

Question 46

Your firm is an Italian importer of bicycles.You have placed an order with a Swiss firm for SFr.2,000,000 worth of bicycles.Payment (in francs)is due in 12 months.Use a money market hedge to redenominate this one-year franc denominated payable into a euro-denominated payable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)€1,116,826.92
B)€1,250,000
C)€1,134,122.29
D)€1,156,804.73

Question 47

A U.S.firm has sold an Italian firm €1,000,000 worth of product.In one year the U.S.firm gets paid.To hedge,the U.S.firm bought put options on the euro with a strike price of $1.65.They paid an option premium $0.01 per euro.If at maturity,the exchange rate is $1.60,

A)the firm will realize $1,145,000 on the sale net of the cost of hedging.
B)the firm will realize $1,150,000 on the sale net of the cost of hedging.
C)the firm will realize $1,140,000 on the sale net of the cost of hedging.
D)none of the options

Question 48

Your firm is an Italian importer of British bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)€1,225,490.20
B)€1,244,212.10
C)€1,250,000
D)€1,219,815.78

Question 49

From the perspective of a corporate CFO,when hedging a payable versus a receivable

A)credit risk considerations are more germane for a payable.
B)credit risk considerations are more germane for a receivable.
C)none of the options

Question 50

A Japanese exporter has a €1,000,000 receivable due in one year.Detail a strategy using a money market hedge that will eliminate any exchange rate risk. $$\begin{array}{l}1 \text {-year rates of interest }\\\begin{array} { l r r } & \text { Borrowing } & \text { Lending } \\\text { Dollar } & 4.5 \% & 4.00 \% \\\text { Euro } & 6.009 & 5.25 \% \\\text { Yen } & 1.00 \% & 0.75 \%\end{array}\end{array}$$

$\begin{array}{lrl}\text { Spot exchange rates } & \text { 1-year Forward Rates } \\\$ 1.25=€ 1.0 C & \$ 1.2262=€ 1.00 \\\$ 1.00=¥ 10 C & \$ 1.03= ¥ 100\end{array}$

A)Borrow €970,873.79 today.Convert the euro to dollars at the spot exchange rate,receive $1,165,048.54.Convert these dollars to yen at the spot rate,receive ¥.
B)Borrow €943,396.22 today.Convert the euro to dollars at the spot exchange rate,convert these dollars to yen at the spot rate,receive ¥117,924,528.30.
C)Lend €943,396.22 today.Convert the euro to dollars at the spot exchange rate,convert these dollars to yen at the spot rate.
D)Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate; lend €943,396.22 at 5.25 percent.

Question 51

Your firm is an Italian exporter of bicycles.You have sold an order to a Swiss firm for SFr.2,000,000 worth of bicycles.Payment from the customer (in Swiss francs)is due in 12 months.Use a money market hedge to redenominate this one-year franc denominated receivable into a euro-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)€1,116,826.92
B)€1,250,000
C)€1,134,122.29
D)€1,156,804.73

Question 52

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00.The annual interest rate is 3 percent in Japan and 6 percent in the United States.XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen.The future dollar cost of meeting this obligation using the forward hedge is

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

Question 53

Your firm is a Swiss exporter of bicycles.You have sold an order to a British firm for £1,000,000 worth of bicycles.Payment from the British firm (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)SFr.2,000,000
B)SFr.2,151,118.62
C)SFr.2,068,383.28
D)SFr.1,921,941.75

Question 54

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00.The annual interest rate is 3 percent in Japan and 6 percent in the United States.XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen.The future dollar cost of meeting this obligation using the money market hedge is

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

Question 55

Which of the following options strategies are internally consistent?

A)Sell puts and buy calls.
B)Buy puts and sell calls.
C)Buy puts and buy calls.
D)Sell puts and buy calls,as well as buy puts and sell calls.

Question 56

Your firm is a U.K.-based exporter of bicycles.You have sold an order to a Swiss firm for SFr.1,000,000 worth of bicycles.Payment from the Swiss firm (in Swiss francs)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	i$ =	1%
	12 months forward	1.6000	€ 0.6250	i€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	i£ =	3%
	12 months forward	1.0000	SFr. 1.0000	iSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

A)£500,000
B)£464,874.41
C)£446,730.77
D)£509,900.99

Question 57

A Japanese exporter has a €1,000,000 receivable due in one year.Detail a strategy using options that will eliminate exchange rate risk. $\begin{array}{llll}\text { Listed Options }\\&\text { Strike } & \text { Puts } &\text { Calls } \\\text { Euro€62,500 } & \$ 1.25=€ 1.0 C & \$ 0.0075 \text { per } € & \$ 0.01^{ per€ } \\\text { Yen?12,500,000 } & \$ 1.00=¥ 10 C & \$ 0.0075 \text { per } ¥ 100 & 0.010^{ per ¥10 }\end{array}$

A)Buy 16 put options on euro,sell 10 call options on yen.
B)Buy 16 put options on euro,buy 10 call options on yen.
C)Sell 16 call options on euro,buy 10 put options on yen.
D)none of the options

Question 58

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.Which of the following is not part of a money market hedge?

A)Buy the ¥750 million at the forward exchange rate.
B)Find the present value of ¥750 million at the Japanese interest rate.
C)Buy that much yen at the spot exchange rate.
D)Invest in risk-free Japanese securities with the same maturity as the accounts payable obligation.

Question 59

Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an Italian firm for €1,000,000 worth of bicycles.Payment from the Italian firm (in €)is due in twelve months.Your firm wants to hedge the receivable into pounds.Not dollars.Interest rates are 3 percent in €,2 percent in $ and 4 percent in £.

Country	U.S.S equiv.		Currency per U.S.$
	Tuesday	Monday	Tuesday	Monday
Britain(pound)£62,500	1.6000	1.6100	0.625	0.6211
1 Month Forward	1.6100	1.6300	0.6211	0.6173
3 Months Forward	1.6300	1.6600	0.6173	0.6024
6 Months Forward	1.6600	1.7200	0.6024	0.5814
12 Months Forward	1.7200	1.8000	0.5814	0.5556
Euro €62,500	1.2000	1.2000	0.833333	0.833333
1 Month Forward	1.2100	1.2100	0.82645	0.82645
3 Months Forward	1.2300	1.2300	0.813008	0.813008
6 Months Forward	1.2600	1.2600	0.793651	0.793651
12 Months Forward	1.2900	1.3200	0.775194	0.757575

Detail a strategy using spot exchange rates and borrowing or lending that will hedge your exchange rate risk.

A)Borrow €970,873.79 in one year you owe €1m,which will be financed with the receivable.Convert €970,873.79 to dollars at spot,receive $1,165,048.54.Convert dollars to pounds at spot,receive £728,155.34.
B)Sell €1m forward using 16 contracts at $1.20 per €1.Buy £750,000 forward using 12 contracts at $1.60 per £1.
C)Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.Buy £750,000 forward using 12 contracts at the forward rate of $1.72 per £1.
D)none of the options

Question 60

A Japanese importer has a $1,250,000 payable due in one year. $$\begin{array} { l c c } \text { Bpot excharge rates } & \text { 1-year Forward Rates } & \text { Contract size } \\\$ 1.00 = ¥100 & \$ 1.00 = ¥ 120 & ¥ 12,500,000\end{array}$$ Detail a strategy using forward contracts that will hedge his exchange rate risk.

A)Go short in 12 yen forward contracts.
B)Go long in 12 yen forward contracts.
C)Go short in 16 yen forward contracts.
D)none of the options

Question 61

On a recent sale,Boeing allowed British Airways to pay either $18 million or £10 million.

A)At the due date,British airways will be indifferent between paying dollars or pounds since they would of course have hedged their exposure either way.
B)Boeing has provided British Airways with a free option to buy $18 million with an exercise price of £10 million.
C)Boeing has provided British Airways with a free option to sell up to £10 million with an exercise price of $18 million.
D)all of the options

Question 62

Your U.S.firm has a £100,000 payable with a 3-month maturity.Which of the following will hedge your liability?

A)Buy the present value of £100,000 today at the spot exchange rate,invest in the U.K.at i_£.
B)Buy a call option on £100,000 with a strike price in dollars.
C)Take a long position in a forward contract on £100,000 with a 3-month maturity.
D)all of the options

Question 63

A call option on £1,000 with a strike price of €1,250 is equivalent to

A)a put option on €1,250 with an exercise price of €1,000.
B)a portfolio of options: a put on €1,250 with a strike price in dollars plus a call on £1,000 with a strike price in dollars.
C)a put option on £1,000 with an exercise price of €1,250.
D)both a put option on €1,250 with an exercise price of €1,000 and a portfolio of options: a put on €1,250 with a strike price in dollars plus a call on £1,000 with a strike price in dollars.

Question 64

To hedge a foreign currency payable,

A)buy call options on the foreign currency.
B)buy put options on the foreign currency.
C)sell call options on the foreign currency.
D)sell put options on the foreign currency.

Question 65

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts)are available on the Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00.Options (calls and puts)are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00.For a U.S.firm to hedge a €100,000 receivable,

A)buy 10 call options on the euro with a strike in dollars.
B)buy 10 put options on the pound with a strike in dollars.
C)sell 10 call options on the euro with a strike in dollars.
D)sell 8 put options on the pound with a strike in dollars.

Question 66

A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with

A)forward contracts on the euro.
B)forward contracts on the ruble.
C)forward contracts on the pound.
D)forward contracts on the yen.

Question 67

Suppose that $2 = £1,$1.60 = €1,and the cross-exchange rate is €1.25 = £1.00.If you own a call option on £10,000 with a strike price of $1.50,you would exercise this option at maturity if

A)the $/£ exchange rate is at least $1.60/£.
B)the $/€ exchange rate is at least $1.60/€.
C)the €/£ exchange rate is at least €1.25/£.
D)none of the options

Question 68

A put option to sell $18,000 at a strike price of $1.80 = £1.00 is equivalent to

A)a call option to buy £10,000 at a strike price of $1.80 = £1.00.
B)a call option on $18,000 at a strike price of $1.80 = £1.00.
C)a put option on £10,000 at a strike price of $1.80 = £1.00.
D)none of the options

Question 69

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts)are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts)are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00.For an Italian firm to hedge a £100,000 payable,

A)buy 10 call options on the pound with a strike in euro.
B)buy 8 put options on the euro with a strike in pounds.
C)buying 10 call options on the pound with a strike in euro or buying 8 put options on the euro with a strike in pounds will both work.
D)none of the options

Question 70

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts)are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts)are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00.For a French firm to hedge a £100,000 receivable,

A)buy 10 call options on the pound with a strike in euro.
B)buy 10 put options on the pound with a strike in euro.
C)buy 8 call options on the euro with a strike in pounds.
D)buy 10 put options on the pound with a strike in euro and buy 8 call options on the euro with a strike in pounds.

Question 71

A minor currency is

A)anything other than the "big six": U.S.dollar,British pound,Japanese yen,euro,Canadian dollar,and Swiss franc.
B)any currency that trades at less than one U.S.dollar.
C)any currency that is less than a $20 denomination.
D)none of the options

Question 72

Your firm is bidding on a large construction contract in a foreign country.This contingent exposure could best be hedged

A)with put options on the foreign currency.
B)with call options on the foreign currency.
C)both with put and call options on the foreign currency,depending upon the specifics ("the rest of the story").
D)with futures contracts.

Question 73

When cross-hedging,

A)try to find one asset that has a positive correlation with another asset.
B)the main thing is to find one asset that covaries with another asset in some predictable way.
C)try to find one asset that has a negative correlation with another asset.
D)none of the options

Question 74

XYZ Corporation,located in the United States,has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo.The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00.The annual interest rate is 3 percent in Japan and 6 percent in the United States.XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen.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 75

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts)are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts)are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00.For a U.K.firm to hedge a €100,000 payable,

A)buy 10 call options on the euro with a strike in pounds sterling.
B)buy 8 put options on the pound with a strike in euro.
C)sell 10 call options on the euro with a strike in pounds sterling.
D)buy 10 call options on the euro with a strike in pounds sterling and buy 8 put options on the pound with a strike in euro.

Question 76

A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to

A)a put option to sell $18,000 at a strike price of $1.80 = £1.00.
B)a call option on $18,000 at a strike price of $1.80 = £1.00.
C)a put option on £10,000 at a strike price of $1.80 = £1.00.
D)none of the options

Question 77

Your U.S.firm has a £100,000 payable with a 3-month maturity.Which of the following will hedge your liability?

A)Buy a call option on £100,000 with a strike price in euro.
B)Buy a put option on £100,000 with a strike price in dollars.
C)Buy a call option on £100,000 with a strike price in dollars.
D)none of the options

Question 78

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts)are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00.Options (calls and puts)are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00.For a U.K.firm to hedge a €100,000 receivable,

A)buy 10 call options on the euro with a strike in pounds sterling.
B)buy 10 put options on the euro with a strike in pounds sterling.
C)buy 8 call options on the pound with a strike in euro.
D)buy 10 put options on the euro with a strike in pounds sterling and buy 8 call options on the pound with a strike in euro.

Question 79

To hedge a foreign currency receivable,

A)buy call options on the foreign currency with a strike in the domestic currency.
B)buy put options on the foreign currency with a strike in the domestic currency.
C)sell call options on the foreign currency with a strike in the domestic currency.
D)sell put options on the foreign currency with a strike in the domestic currency.

Question 80

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts)are available on the Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00.Options (calls and puts)are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00.For a U.S.firm to hedge a €100,000 payable,

A)buy 10 call options on the euro with a strike in dollars.
B)buy 8 put options on the pound with a strike in dollars.
C)sell 10 call options on the euro with a strike in dollars.
D)sell 8 put options on the pound with a strike in dollars.