Chapter 23 - Foreign exchange hedging

Which of the following is not a type of FX risk?
1. Interest rate risk
2. Transaction risk
3. Translation risk
4. Economic risk
A company decides to do nothing about its exposure to transaction risk. This means:
1. It is bound to be worse off
2. The management are negligent
3. It might or might not be taking a significant risk
4. Management are risk seekers
The €/£ spot is 1.35 - 1.37, 3 month forward is 1.37 - 1.40. 3 month money market interest rates are

Deposit Loan
€ 6% 8%
£ 5% 7%

A company will receive €2m in three months time and decides to use a money market hedge. The value of the €2m is:
1. £1.961m
2. £1.431m
3. £1.449m
4. £1.460m
If the company used a forward market hedge, the value of the €2m is:
1. £1.481m
2. £1.460m
3. £1.429m
4. £1.414m
In comparison to forward FX hedging, futures hedging:
1. Involve a higher initial payment (margin)
2. Are of smaller contract size
3. Are easier to negotiate
4. Are available 24 hours a day, 7 days a week
Returning to the example in question 3, our company has the opportunity to hedge by buying a 3 month option to sell €2m at 1.39. If the option costs £5,000 is it worthwhile?
1. Most unlikely
2. Almost certainly
3. Certainly
4. Definitely not
If a company will have to pay a FX debt by March 31st. It has an option to buy €2m at 1.39 on March 31st. On March 1st the €/£ spot rate is 1.37½. The company should:
1. Exercise the option on March 31st
2. Settle the invoice immediately and let the option expire
3. Settle the invoice immediately and try to sell on the option
4. Get the bank to cancel the option
Compared with futures, which of the following is not a reason why a large company is likely to prefer to use forward contracts:
1. The forward rate is likely to be negociable
2. All currencies are covered by forward contracts
3. Futures markets may be too small to deal with the size of a very large requirement
4. There is less risk involved in futures
The main advantage of using FX options rather than futures is:
1. They are cheaper
2. They are more secure
3. They allow for gains if the currencies move in the right way
4. They are easier to arrange
Which of the following is not an advantage of over the counter options as compared to traded options
1. OTC options are available in cross currencies
2. OTC options are more easily traded
3. The transaction costs of OTC options are more likely to be negotiable
4. OTC options are available over a longer period than traded options

	Deposit	Loan
€	6%	8%
£	5%	7%

Chapter 23 - Foreign exchange hedging

Quiz