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 ___________%.

Accepted Answer

The forward rate is higher than the spot rate, indicating a premium. The annualized premium can be calculated as [(Forward Rate - Spot Rate) / Spot Rate] * (365 / Days) = [(0.325 - 0.320) / 0.320] * (365 / 30) = 0.015625 * 12.1667 = 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?

Accepted Answer

D

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:

Accepted Answer

The forward hedge will result in more pounds received if the future spot rate is less than the forward rate of £0.425. The probabilities of the spot rate being £0.41, £0.42, or £0.43 are 10%, 20%, and 40%, respectively. Therefore, the probability that the forward hedge will result in more pounds is 10% + 20% = 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).

Accepted Answer

The forward hedge guarantees a rate of £0.36, while the options hedge involves a premium cost. The options hedge is beneficial only if the spot rate in 180 days is above £0.37 for the call option or below £0.36 for the put option, considering the premium paid. Given the probability distribution, the forward hedge will result in more U.S. dollars received than the options hedge unless the spot rate is £0.40 (30% probability). Therefore, in 70% of the scenarios (£0.30 with 10% probability and £0.35 with 60% probability), the forward hedge is more advantageous.

Question 5

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

Accepted Answer

Economic exposure refers to the potential impact of exchange rate fluctuations on a company's future cash flows, earnings, and ultimately, its market value, affecting decisions related to foreign direct investment.

Question 6

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

Accepted Answer

Buying additional foreign subsidiaries is not a step in currency exposure management. Currency exposure management typically involves identifying and assessing the risk of currency fluctuations on an organization's finances, and then taking steps to mitigate that risk, such as forecasting exposure, developing reporting systems, and assigning responsibility for hedging. Buying additional foreign subsidiaries would not be a direct method of managing currency exposure; it could actually increase exposure to currency risk.

Question 7

Operational techniques include:

Accepted Answer

Operational techniques for managing exposure in international finance include diversification of a company's operations and exposure netting. Diversification helps spread risk across different markets or products, while exposure netting offsets exposures in one currency with exposures in the same or another currency, reducing the net exposed amount. Purchasing currency options is a financial, not operational, technique.

Question 8

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

Accepted Answer

An options market hedge allows a company to benefit from favorable exchange rate movements while protecting it from adverse ones. By purchasing options, the company has the right, but not the obligation, to exchange currency at a predetermined rate, thus providing flexibility.

Question 9

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

Accepted Answer

The answer of Which of the following are rules to...

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?

Accepted Answer

The U.S. company should exercise the option because the strike price of $1.7 per pound is lower than the spot market rate of $1.8 per pound, allowing the company to save money on the exchange.

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:

Accepted Answer

Entering into a 90-day forward sale of US dollars for euros allows the firm to lock in an exchange rate today for a transaction that will occur in the future, thus avoiding the risk of exchange rate movements.

Question 12

A forward currency transaction:

Accepted Answer

A forward currency transaction involves an agreement to exchange currencies at a future date at a predetermined rate, not at an unknown rate or within one or two business days, and it is not 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:

Accepted Answer

The monetary/non-monetary method and the current rate method differ significantly in their treatment of inventories and fixed assets. The monetary/non-monetary method translates monetary items at the current exchange rate and non-monetary items (like inventories and fixed assets) at historical rates, whereas the current rate method translates all assets and liabilities at the current exchange rate.

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:

Accepted Answer

The answer of If the Indian subsidiary of a US...

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

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 _%.