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Exam 8: Management of Transaction Exposure

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Question 31

Multiple Choice

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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) Both a and b

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Question 32

Multiple Choice

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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. 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

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Question 33

Multiple Choice

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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: $\begin{array} { l l } \text { The U.S. one-year interest rate: } & 6.10 \% \text { per annum } \\\text { The euro zone one-year interest rate: } & 9.00 \% \text { per annum } \\\text { The spot exchange rate: } & \$ 1.50 / € \\\text { The one-year forward exchange rate: } & \$ 1.46 / €\end{array}$ 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.dollar.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?

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

A stock market investor would pay attention to

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

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: $\begin{array} { l l } \text { The U.S. one-year interest rate: } & 6.10 \% \text { per annum } \\\text { The euro zone one-year interest rate: } & 9.00 \% \text { per annum } \\\text { The spot exchange rate: } & \$ 1.50 / € \\\text { The one-year forward exchange rate: } & \$ 1.46 / €\end{array}$ 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.dollar.Which of the following is (or are) true? On the maturity date of the contract Boeing will: (i) have to deliver €10 million to the bank (the counterparty of the forward 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 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 5-year swap contract can be viewed as a portfolio of 5 forward contracts with maturities of 1,2,3,4 and 5 years.One important exception is that

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

Generally speaking,a firm with recurrent exposure can best hedge using which product?

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.

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

Contingent exposure can best be hedged with

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

Buying a currency option provides

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.

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

A study of Fortune 500 firms hedging practices shows that

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,