Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Assume zero transaction costs. If the 90-day forward rate of the euro is an
accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will
be:
a. | positive. | b. | negative. | c. | positive if the
forward rate exhibits a premium, and negative if the forward rate exhibits a
discount. | d. | zero. |
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2.
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An example of cross-hedging is:
a. | find two currencies that are highly positively correlated; match the payables of the
one currency to the receivables of the other currency. | b. | use the forward market to sell forward whatever
currencies you will receive. | c. | use the forward market to buy forward whatever
currencies you will receive. | d. | B and C |
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3.
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The real cost of hedging payables with a forward contract equals:
a. | the nominal cost of hedging minus the nominal cost of not
hedging. | b. | the nominal cost of not hedging minus the nominal cost of
hedging. | c. | the nominal cost of hedging divided by the nominal cost of not
hedging. | d. | the nominal cost of not hedging divided by the nominal cost of
hedging. |
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4.
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Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain
that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal
strategy is to:
a. | sell euros forward. | b. | write euro currency put
options. | c. | purchase euro currency call options. | d. | purchase euros forward. | e. | remain
unhedged. |
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5.
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A _______ involves an exchange of currencies between two parties, with a promise
to re-exchange currencies at a specified exchange rate and future date.
a. | long-term forward contract | c. | parallel loan | b. | currency
swap | d. | money market
hedge |
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6.
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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? a. | £101,904 | b. | £101,923 | c. | £88,769 | d. | £84,919 | e. | £72,307 |
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7.
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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: a. | 10%. | b. | 20%. | c. | 30%. | d. | 50%. | e. | 70%. |
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8.
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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). a. | 10% | b. | 30% | c. | 40% | d. | 70% | e. | none of the
above |
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9.
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Refer to Exhibit 11-1. Perkins ltd. will receive 250,000 Jordanian dinar (JOD)
in 360 days. The current spot rate of the dinar is £0.82, while the 360-day forward rate is
£0.80. How much will Perkins receive in 360 days from implementing a money market hedge (assume
any receipts before the date of the receivable are invested)?
a. | £277,115. | c. | £263,019. | b. | £273,558. | d. | £205,000. |
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10.
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Refer to Exhibit 11-1. Pablo SA will need 150,000 Jordanian dinar (JOD) in 360
days. The current spot rate of the dinar is £1.184, while the 360-day forward rate is
£1.168. What is Pablo's cost (to the nearest £) from implementing a money market hedge
(assume Pablo does not have any excess cash)?
a. | £200,460. | c. | £173,282. | b. | £181,015. | d. | £195,273. |
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11.
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Which of the following is the least effective way of hedging transaction
exposure in the long run?
a. | long-term forward contract. | c. | parallel loan. | b. | currency
swap. | d. | money market
hedge. |
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12.
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In a forward hedge, if the forward rate is an accurate predictor of the future
spot rate, the real cost of hedging payables will be:
a. | highly positive. | c. | zero. | b. | highly negative. | d. | none of the
above |
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