Question 1

The decision to hedge or not to hedge foreign currency exposure is a speculative decision because:
A) both hedging and speculation involve a deliberate assumption of risk
B) it depends on the expected movement in the exchange rate
C) hedging is a profit making operation
D) the outcome of hedging depends on movements in the forward rate

Accepted Answer

Hedging foreign currency exposure is considered speculative when it is based on expectations about future exchange rate movements. If a company decides to hedge, it is often because it anticipates that the currency will move in a direction that could be unfavorable to its operations or financial results. This decision involves making predictions about future market conditions, which is inherently speculative.

Question 2

Which of the following is NOT an argument why there is NO need to worry about foreign exchange risk?
A) If international parity conditions hold then foreign exchange risk will not arise
B) Foreign exchange risk can be controlled if it is possible to forecast exchange rates
C) Risk implies both good and bad outcomes
D) Shareholders are naturally hedged through diversification

Accepted Answer

C

Question 3

If unbiased efficiency holds then:
A) forward hedging will be unnecessary in the long run
B) forward hedging will be useful in the long run
C) forward hedging will be unnecessary in the short run and the long run
D) hedging will be successful only if it is based on a spot exchange rate forecast other than the forward rate

Accepted Answer

If unbiased efficiency holds, it means that the forward exchange rate is an unbiased predictor of the future spot exchange rate. Therefore, in the long run, forward hedging would be unnecessary because the market's current expectations of future spot rates (as reflected in forward rates) are accurate on average.

Question 4

If UIP holds then:
A) foreign interest rates will equal domestic interest rates so hedging is unnecessary
B) the spot exchange rate will not change so hedging is unnecessary
C) the forward rate will equal the spot rate at maturity of the forward contract so hedging is unnecessary
D) the foreign currency return will equal the domestic currency return and any change in the spot rate . will be offset by change in the interest rate differential so hedging is unnecessary

Accepted Answer

The Uncovered Interest Parity (UIP) theory posits that the difference in interest rates between two countries will equal the expected change in exchange rates between the countries' currencies. Therefore, if UIP holds, any potential gains from currency exchange rate fluctuations would be offset by interest rate differentials, making currency hedging unnecessary.

Question 5

If PPP holds then:
A) real currency depreciation or appreciation will not occur as changes in commodity prices will be offset by changes in the nominal exchange rate so hedging will not be necessary
B) the spot exchange rate will not change so hedging will not be necessary
C) the forward rate will equal the spot rate at maturity of the forward contract so hedging will not be necessary
D) the foreign currency return will equal the domestic currency return and any change in the spot rate . will be offset by change in the interest rate differential so hedging will not be necessary

Accepted Answer

If PPP (Purchasing Power Parity) holds, real currency depreciation or appreciation will not occur because changes in commodity prices will be offset by changes in the nominal exchange rate, making hedging unnecessary.

Question 6

Which of the following statements is NOT a benefit of hedging?
A) In a progressive tax environment hedging increases after tax income
B) A more stable income may be more conducive to sales in the case of consumer durables and capital goods
C) Firms which hedge are valued significantly more highly than firms which do not hedge
D) Volatile earnings may lead to higher employee turnover and higher wage demands

Accepted Answer

Hedging is primarily aimed at reducing financial risk and stabilizing earnings, rather than directly increasing a firm's market valuation. The statement that firms which hedge are valued significantly more highly than firms which do not hedge oversimplifies the complex factors that contribute to a firm's valuation.

Question 7

A decision to hedge payables in the money market will be taken if:
A) the domestic interest rate is higher than the foreign interest rate
B) the domestic interest rate is lower than the foreign interest rate
C) the interest parity forward rate is higher than the expected spot rate
D) the interest parity forward rate is lower than the expected spot rate

Accepted Answer

The answer of A decision to hedge payables in the...

Question 8

A decision to hedge receivables in the money market will be taken if:
A) the domestic interest rate is higher than the foreign interest rate
B) the domestic interest rate is lower than the foreign interest rate
C) the interest parity forward rate is higher than the expected spot rate
D) the interest parity forward rate is lower than the expected spot rate

Accepted Answer

A decision to hedge receivables in the money market will be taken if the interest parity forward rate is higher than the expected spot rate, as this indicates that the forward market is offering a better rate than what is expected in the future spot market, making it advantageous to lock in the forward rate.

Question 9

In the presence of bid-offer spreads the decision to hedge payables in the money market will be taken if:
A) the offer interest parity forward rate is lower than the expected offer spot rate
B) the offer interest parity forward rate is higher than the expected offer spot rate
C) the bid interest parity forward rate is lower than the expected bid spot rate
D) the bid interest parity forward rate is equal to the expected offer spot rate

Accepted Answer

When hedging payables, a company aims to lock in a rate that is lower than what it expects to pay in the future. If the offer interest parity forward rate is lower than the expected offer spot rate, it means the company can secure a more favorable rate now, making hedging advantageous.

Question 10

In the presence of bid-offer spreads the decision NOT to hedge payables in the money market will be taken if:
A) the offer interest parity forward rate is lower than the expected offer spot rate
B) the offer interest parity forward rate is higher than the expected offer spot rate
C) the bid interest parity forward rate is lower than the expected bid spot rate
D) the bid interest parity forward rate is equal to the expected offer spot rate

Accepted Answer

The decision not to hedge payables in the money market would be taken if the offer interest parity forward rate is higher than the expected offer spot rate. This implies that the future cost of hedging (using the forward rate) is expected to be higher than the cost of not hedging and instead buying the currency in the spot market at the expected future rate.

Question 11

In the presence of bid-offer spreads the decision to hedge receivables in the money market will be taken if:
A) the offer interest parity forward rate is lower than the expected offer spot rate
B) the bid interest parity forward rate is higher than the expected bid spot rate
C) the bid interest parity forward rate is lower than the expected bid spot rate
D) the bid interest parity forward rate is higher than the expected offer spot rate

Accepted Answer

The answer of In the presence of bid-offer spreads the...

Question 12

In the presence of bid-offer spreads the decision NOT to hedge receivables in the money market will be taken if:
A) the offer interest parity forward rate is lower than the expected offer spot rate
B) the bid interest parity forward rate is higher than the expected bid spot rate
C) the bid interest parity forward rate is lower than the expected bid spot rate
D) the bid interest parity forward rate is higher than the expected offer spot rate

Accepted Answer

The decision not to hedge receivables in the money market will be taken if the bid interest parity forward rate is lower than the expected bid spot rate, as it suggests that the forward rate is less favorable than the expected future spot rate.

Question 13

In the presence of bid-offer spreads, there will be indifference between the hedge and no-hedge decisions with respect to payables when:
A) the offer interest parity forward rate is equal to the expected offer spot rate
B) the offer interest parity forward rate is equal to the expected bid spot rate
C) the bid interest parity forward rate is equal to the expected offer spot rate
D) the bid interest parity forward rate is equal to the expected bid spot rate

Accepted Answer

When the offer interest parity forward rate is equal to the expected offer spot rate, it means that the cost of hedging (using the forward rate) is equal to the expected cost of not hedging (using the expected spot rate). This creates a situation of indifference between choosing to hedge or not.

Question 14

In the presence of bid-offer spreads, there will be indifference between the hedge and no-hedge decisions with respect to receivables when:
A) the offer interest parity forward rate is equal to the expected offer spot rate
B) the offer interest parity forward rate is equal to the expected bid spot rate
C) the bid interest parity forward rate is equal to the expected offer spot rate
D) the bid interest parity forward rate is equal to the expected bid spot rate

Accepted Answer

The indifference between hedging and not hedging receivables occurs when the bid interest parity forward rate is equal to the expected bid spot rate. This means that the cost of hedging (using the forward rate) is equal to the expected cost of not hedging (using the expected spot rate), making the decision between the two neutral.

Question 15

A decision to hedge payables in the forward market will be taken if:
A) the actual forward rate is higher than the expected spot rate
B) the actual forward rate is lower than the expected spot rate
C) the interest parity forward rate is equal to the expected spot rate
D) the interest parity forward rate is higher than the expected spot rate

Accepted Answer

A decision to hedge payables in the forward market is typically taken if the actual forward rate is lower than the expected spot rate. This means the company expects the future spot rate to be higher, so locking in a lower rate now through a forward contract will save money.

Question 16

A decision to hedge receivables in the forward market will be taken if:
A) the actual forward rate is higher than the expected spot rate
B) the actual forward rate is lower than the expected spot rate
C) the interest parity forward rate is lower than the expected spot rate
D) the interest parity forward rate is equal to the expected spot rate

Accepted Answer

CA decision to hedge receivables in the forward market is taken if the actual forward rate is higher than the expected spot rate, as this implies that by hedging, the company can lock in a higher exchange rate now than what it expects to receive in the future, thereby protecting against currency depreciation. Similarly, if the interest parity forward rate is lower than the expected spot rate, it indicates that the market's forward rate is more favorable than what the company expects in the future, making hedging advantageous to lock in a better rate.

Question 17

Forward hedging of payables will be preferred to money market hedging if the actual forward rate is:
A) higher than the expected spot rate
B) lower than the expected spot rate
C) lower than the interest parity forward rate
D) higher than the expected spot rate.

Accepted Answer

The answer of Forward hedging of payables will be preferred...

Question 18

Money market hedging of payables will be preferred to forward hedging if the actual forward rate is:
A) higher than the expected spot rate
B) lower than the expected spot rate
C) higher than the interest parity forward rate
D) higher than the expected spot rate.

Accepted Answer

The answer of Money market hedging of payables will be...

Question 19

Money market hedging of receivables will be preferred to forward hedging if the actual forward rate is:
A) higher than the expected spot rate
B) lower than the expected spot rate
C) lower than the interest parity forward rate
D) higher than the expected spot rate.

Accepted Answer

The answer of Money market hedging of receivables will be...

Question 20

Forward hedging of receivables will be preferred to money market hedging if the actual forward rate is:
A) higher than the expected spot rate
B) lower than the expected spot rate
C) higher than the interest parity forward rate
D) equal to the expected spot rate

Accepted Answer

The answer of Forward hedging of receivables will be preferred...

Quiz 13: Foreign Exchange Risk Management

The decision to hedge or not to hedge foreign currency exposure is a speculative decision because:

Which of the following is NOT an argument why there is NO need to worry about foreign exchange risk?

If unbiased efficiency holds then:

If UIP holds then:

If PPP holds then:

Which of the following statements is NOT a benefit of hedging?

A decision to hedge payables in the money market will be taken if:

A decision to hedge receivables in the money market will be taken if:

In the presence of bid-offer spreads the decision to hedge payables in the money market will be taken if:

In the presence of bid-offer spreads the decision NOT to hedge payables in the money market will be taken if:

In the presence of bid-offer spreads the decision to hedge receivables in the money market will be taken if:

In the presence of bid-offer spreads the decision NOT to hedge receivables in the money market will be taken if:

In the presence of bid-offer spreads, there will be indifference between the hedge and no-hedge decisions with respect to payables when:

In the presence of bid-offer spreads, there will be indifference between the hedge and no-hedge decisions with respect to receivables when:

A decision to hedge payables in the forward market will be taken if:

A decision to hedge receivables in the forward market will be taken if:

Forward hedging of payables will be preferred to money market hedging if the actual forward rate is:

Money market hedging of payables will be preferred to forward hedging if the actual forward rate is:

Money market hedging of receivables will be preferred to forward hedging if the actual forward rate is:

Forward hedging of receivables will be preferred to money market hedging if the actual forward rate is: