Chapter 11Managing Transaction Exposure1. 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. ANSWER: D 2. Assume
zero transaction costs. If the 180-day forward rate is an accurate
estimate of the spot rate 180 days from now, then the real cost of
hedging receivables 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. ANSWER: D 3. Assume the
following information: U.S. deposit rate for 1 year U.S. borrowing
rate for 1 year Swiss deposit rate for 1 year Swiss borrowing rate
for 1 year Swiss forward rate for 1 year Swiss franc spot rate = =
= = = = 11% 12% 8% 10% $.40 $.39
Also assume that a U.S. exporter denominates its Swiss exports
in Swiss francs and expects to receive SF600,000 in 1 year. Using
the information above, what will be the approximate value of these
exports in 1 year in U.S. dollars given that the firm executes a
forward hedge? A) $234,000. B) $238,584. C) $240,000. D) $236,127.
ANSWER: C SOLUTION: SF600,000 $.40 = $240,000
2
34. Assume the following information: U.S. deposit rate for 1
year U.S. borrowing rate for 1 year New Zealand deposit rate for 1
year New Zealand borrowing rate for 1 year New Zealand dollar
forward rate for 1 year New Zealand dollar spot rate = = = = = =
11% 12% 8% 10% $.40 $.39
International Financial Management
Also assume that a U.S. exporter denominates its New Zealand
exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are
a consultant for this firm. Using the information above, what will
be the approximate value of these exports in 1 year in U.S. dollars
given that the firm executes a money market hedge? A) $238,584. B)
$240,000. C) $234,000. D) $236,127. ANSWER: D SOLUTION: 1. Borrow
NZ$545,455 (NZ$600,000/1.1) = NZ$545,455. 2. Convert NZ$545,455 to
$212,727 (at $.39 per NZ$). 3. Invest $212,727 to accumulate
$236,127 ($212,727 1.11) = $236,127. 5. 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) use the forward
market to sell forward or buy forward whatever currencies you will
receive. ANSWER: A 6. Which of the following reflects a hedge of
net receivables in British pounds by a U.S. firm? A) purchase a
currency put option in British pounds. B) sell pounds forward. C)
borrow U.S. dollars, convert them to pounds, and invest them in a
British pound deposit. D) purchase a current put option in British
pounds OR sell pounds forward ANSWER: D
Chapter 11: Managing Transaction Exposure7. Which of the
following reflects a hedge of net payables on British pounds by a
U.S. firm? A) purchase a currency put option in British pounds. B)
sell pounds forward. C) sell a currency call option in British
pounds. D) borrow U.S. dollars, convert them to pounds, and invest
them in a British pound deposit. E) purchase a currency put option
in British pounds OR sell pounds forward ANSWER: D
4
8. If Lazer Co. desired to lock in the maximum it would have to
pay for its net payables in euros but wanted to be able to
capitalize if the euro depreciates substantially against the dollar
by the time payment is to be made, the most appropriate hedge would
be: A) a money market hedge. B) purchasing euro put options. C) a
forward purchase of euros. D) purchasing euro call options. E)
selling euro call options. ANSWER: D 9. If a Salerno Inc. desired
to lock in a minimum rate at which it could sell its net
receivables in Japanese yen but wanted to be able to capitalize if
the yen appreciates substantially against the dollar by the time
payment arrives, the most appropriate hedge would be: A) a money
market hedge. B) a forward sale of yen. C) purchasing yen call
options. D) purchasing yen put options. E) selling yen put options.
ANSWER: D 10. 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. ANSWER: A 11. From the
perspective that Detroit Co. has payables in Mexican pesos and
receivables in Canadian dollars, hedging the payables would be most
desirable if the expected real cost of hedging payables is _______,
and hedging the receivables would be most desirable if the expected
real cost of hedging receivables is _______. A) negative; positive
B) zero; positive C) zero; zero D) positive; negative E) negative;
negative ANSWER: E
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International Financial Management
12. Use the following information to calculate the dollar cost
of using a money market hedge to hedge 200,000 pounds of payables
due in 180 days. Assume the firm has no excess cash. Assume the
spot rate of the pound is $2.02 and the 180-day forward rate is
$2.00. The British interest rate is 5%, and the U.S. interest rate
is 4% over the 180-day period. A) $391,210. B) $396,190. C)
$388,210. D) $384,761. E) none of these. ANSWER: E SOLUTION: 1.
Need to invest 190,476 (200,000/1.05) = 190,476. 2. Need to
exchange $384,762 to obtain the 190,476 (190,476 $2.02) = $384,762.
3. At the end of 180 days, need $400,152 to repay loan ($384,762
1.04) = $400,152. 13. Assume that Cooper Co. will not use its cash
balances in a money market hedge. When deciding between a forward
hedge and a money market hedge, it _______ determine which hedge is
preferable before implementing the hedge. It _______ determine
whether either hedge will outperform an unhedged strategy before
implementing the hedge. A) can; can B) can; cannot C) cannot; can
D) cannot; cannot ANSWER: B 14. 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)
purchase euro currency put options. C) purchase euro currency call
options. D) purchase euros forward. E) remain unhedged. ANSWER:
A
Chapter 11: Managing Transaction Exposure
6
15. Spears Co. will receive SF1,000,000 in 30 days. Use the
following information to determine the total dollar amount received
(after accounting for the option premium) if the firm purchases and
exercises a put option: Exercise price Premium Spot rate Expected
spot rate in 30 days 30-day forward rate A) B) C) D) E) $630,000.
$610,000. $600,000. $590,000. $580,000. = = = = = $.61 $.02 $.60
$.56 $.62
ANSWER: D SOLUTION: ($.61 $.02) SF1,000,000 = $590,000 16. 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 B) currency
option contract C) parallel loan D) money market hedge ANSWER: C
17. If interest rate parity exists and transactions costs are zero,
the hedging of payables in euros with a forward hedge will: A) have
the same result as a call option hedge on payables. B) have the
same result as a put option hedge on payables. C) have the same
result as a money market hedge on payables. D) require more dollars
than a money market hedge. E) have the same result as a call option
hedge on payables AND require more dollars than a money market
hedge. ANSWER: C
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International Financial Management
18. Assume that Parker Company will receive SF200,000 in 360
days. Assume the following interest rates: 360-day borrowing rate
360-day deposit rate U.S. 7% 6% Switzerland 5% 4%
Assume the forward rate of the Swiss franc is $.50 and the spot
rate of the Swiss franc is $.48. If Parker Company uses a money
market hedge, it will receive _______ in 360 days. A) $101,904 B)
$101,923 C) $98,769 D) $96,914 E) $92,307 ANSWER: D SOLUTION: 1.
Borrow SF190,476 (SF200,000/1.05) = SF190,476.
2. Convert SF190,476 to $91,428 (SF190,476 $.48) = $91,428.3.
Invest $91,428 at 6% to accumulate $96,914 ($91,428 1.06) =
$96,914. 19. The forward rate of the Swiss franc is $.50. The spot
rate of the Swiss franc is $.48. The following interest rates
exist: 360-day borrowing rate 360-day deposit rate U.S. 7% 6%
Switzerland 5% 4%
You need to purchase SF200,000 in 360 days. If you use a money
market hedge, the amount of dollars you need in 360 days is: A)
$101,904. B) $101,923. C) $98,770. D) $96,914. E) $92,307. ANSWER:
C SOLUTION: 1. Need to invest SF192,308 (SF200,000/1.04) =
SF192,308. 2. Need to borrow $92,308 to exchange for SF192,308
(SF192,308 $.48) = $92,308. 3. At the end of 360 days, need $98,769
to repay the loan ($92,308 1.07) = $98,770.
Chapter 11: Managing Transaction Exposure
8
20. Your company will receive C$600,000 in 90 days. The 90-day
forward rate in the Canadian dollar is $.80. If you use a forward
hedge, you will: A) receive $750,000 today. B) receive $750,000 in
90 days. C) pay $750,000 in 90 days. D) receive $480,000 today. E)
receive $480,000 in 90 days. ANSWER: E SOLUTION: C$600,000 $0.80 =
$480,000 21. A call option exists on British pounds with an
exercise price of $1.60, a 90-day expiration date, and a premium of
$.03 per unit. A put option exists on British pounds with an
exercise price of $1.60, a 90-day expiration date, and a premium of
$.02 per unit. You plan to purchase options to cover your future
receivables of 700,000 pounds in 90 days. You will exercise the
option in 90 days (if at all). You expect the spot rate of the
pound to be $1.57 in 90 days. Determine the amount of dollars to be
received, after deducting payment for the option premium. A)
$1,169,000. B) $1,099,000. C) $1,106,000. D) $1,143,100. E)
$1,134,000. ANSWER: C SOLUTION: ($1.60 $.02) 700,000 = $1,106,000
22. Assume that Smith Corporation will need to purchase 200,000
British pounds in 90 days. A call option exists on British pounds
with an exercise price of $1.68, a 90-day expiration date, and a
premium of $.04. A put option exists on British pounds, with an
exercise price of $1.69, a 90-day expiration date, and a premium of
$.03. Smith Corporation plans to purchase options to cover its
future payables. It will exercise the option in 90 days (if at
all). It expects the spot rate of the pound to be $1.76 in 90 days.
Determine the amount of dollars it will pay for the payables,
including the amount paid for the option premium. A) $360,000. B)
$338,000. C) $332,000. D) $336,000. E) $344,000. ANSWER: E
SOLUTION: ($1.68 + $.04) 200,000 = $344,000
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International Financial Management
23. Assume that Kramer Co. will receive SF800,000 in 90 days.
Todays spot rate of the Swiss franc is $.62, and the 90-day forward
rate is $.635. Kramer has developed the following probability
distribution for the spot rate in 90 days: Possible Spot Rate in 90
Days $.61 $.63 $.64 $.65 Probability 10% 20% 40% 30%
The probability that the forward hedge will result in more
dollars received than not hedging is: A) 10%. B) 20%. C) 30%. D)
50%. E) 70%. ANSWER: C SOLUTION: The forward hedge will result in
more dollars if the spot rate is less than the forward rate, which
is true in the first two cases. 24. Assume that Jones Co. will need
to purchase 100,000 Singapore dollars (S$) in 180 days. Todays spot
rate of the S$ is $.50, and the 180-day forward rate is $.53. A
call option on S$ exists, with an exercise price of $.52, a premium
of $.02, and a 180-day expiration date. A put option on S$ exists,
with an exercise price of $.51, a premium of $.02, and a 180-day
expiration date. Jones has developed the following probability
distribution for the spot rate in 180 days: Possible Spot Rate in
90 Days $.48 $.53 $.55 Probability 10% 60% 30%
The probability that the forward hedge will result in a higher
payment than the options hedge is _______ (include the amount paid
for the premium when estimating the U.S. dollars required for the
options hedge). A) 0% B) 10% C) 30% D) 40% E) 70% ANSWER: B
SOLUTION: There is a 10% probability that the call option will not
be exercised. In that case, Jones will pay $.48 S$100,000 =
$48,000, which is less than the amount paid with the forward hedge
($.53 S$100,000 = $53,000).
Chapter 11: Managing Transaction Exposure
10
25. Assume that Patton Co. will receive 100,000 New Zealand
dollars (NZ$) in 180 days. Todays spot rate of the NZ$ is $.50, and
the 180-day forward rate is $.51. A call option on NZ$ exists, with
an exercise price of $.52, a premium of $.02, and a 180-day
expiration date. A put option on NZ$ exists with an exercise price
of $.51, a premium of $.02, 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 $.48 $.49 $.55
Probability 10% 60% 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 these ANSWER: D SOLUTION: The put option will be exercised in
the first two cases, resulting in an amount received per unit of
$.51 $.02 = $.49. Thus, the forward hedge will result in more U.S.
dollars received ($.51 per unit).
26.A) B) C) D) E)
The _______ hedge is not a technique to eliminate transaction
exposure discussed in the text. index futures forward money market
currency option
ANSWER: A
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International Financial Management
27. Money Corp. frequently uses a forward hedge to hedge its
Malaysian ringgit (MYR) receivables. For the next month, Money has
identified its net exposure to the ringgit as being MYR1,500,000.
The 30-day forward rate is $.23. Furthermore, Moneys financial
center has indicated that the possible values of the Malaysian
ringgit at the end of next month are $.20 and $.25, with
probabilities of .30 and .70, respectively. Based on this
information, what is the expected real cost of hedging receivables?
A) $0. B) $7,500. C) $7,500. D) none of these. ANSWER: C
SOLUTION:
RCH (1) = ( MYR1,500 ,000 $0.20) ( MYR1,500,000 $0.23) = $45,000
RCH (2) = ( MYR1,500,000 $0.25) ( MYR1,500,000 $0.23) = $30,000 E [
RCH ] = (.30)( 45,000) + (.7)( 30,000) = 7,500
28. Hanson Corp. frequently uses a forward hedge to hedge its
British pound () payables. For the next quarter, Hanson has
identified its net exposure to the pound as being 1,000,000. The
90-day forward rate is $1.50. Furthermore, Hansons financial center
has indicated that the possible values of the British pound at the
end of next quarter are $1.57 and $1.59, with probabilities of .50
and . 50, respectively. Based on this information, what is the
expected real cost of hedging payables? A) $80,000. B) $80,000. C)
$1,570,000. D) $1,580,000. ANSWER: B SOLUTION:
RCH (1) = (1,000,000 $1.50) (1,000,000 $1.57) = $70,000 RCH (2)
= (1,000,000 $1.50) (1,000,000 $1.59) = $90,000 E[ RCH ] =
(.50)(70,000) + (.50)(90,000) = 80,000
Chapter 11: Managing Transaction ExposureThe following
information refers to questions 29 and 30. 360-day borrowing rate
360-day deposit rate U.S. 6% 5% Jordan 5% 4%
12
29. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in
360 days. The current spot rate of the dinar is $1.48, while the
360-day forward rate is $1.50. 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) $377,115. B)
$373,558. C) $363,019. D) $370,000. ANSWER: D SOLUTION: 1. Borrow
JOD238,095.24 (JOD250,000/1.05) = JOD238,095.24.
2. 3.
Convert JOD238,095.24 to $352,380.95 (JOD238,095.24 $1.48) =
$352,380.95. Invest $352,380.95 at 5% to accumulate $370,000
($352,280.95 1.05) = $370,000.
30. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360
days. The current spot rate of the dinar is $1.48, while the
360-day forward rate is $1.46. What is Pablos cost from
implementing a money market hedge (assume Pablo does not have any
excess cash)? A) $224,135. B) $226,269. C) $224,114. D) $223,212.
ANSWER: B SOLUTION: 1. Need to invest JOD144,230.76
(JOD150,000/1.04) = JOD144,230.76. Need to convert $213,461.52 to
obtain the JOD144,230.76 dinar (JOD144,230.76 $1.48) =
$213,461.52.
2. 3.
At the end of 360 days, need $226,269.22 ($213,461.52 1.06) =
$226,269.21.
13
International Financial Management
31. Lorre Company needs 200,000 Canadian dollars (C$) in 90 days
and is trying to determine whether or not to hedge this position.
Lorre has developed the following probability distribution for the
Canadian dollar: Possible Value of Canadian Dollar in 90 Days $0.54
0.57 0.58 0.59 Probability 15% 25% 35% 25%
The 90-day forward rate of the Canadian dollar is $.575, and the
expected spot rate of the Canadian dollar in 90 days is $.55. If
Lorre implements a forward hedge, what is the probability that
hedging will be more costly to the firm than not hedging? A) 40%.
B) 60%. C) 15%. D) 85%. ANSWER: A SOLUTION: Since Lorre locks into
the $.575 with a forward contract, the first two cases would have
been cheaper had Lorre not hedged (15% + 25% = 40%). 32. Quasik
Corporation will be receiving 300,000 Canadian dollars (C$) in 90
days. Currently, a 90day call option with an exercise price of $.75
and a premium of $.01 is available. Also, a 90-day put option with
an exercise price of $.73 and a premium of $.01 is available.
Quasik plans to purchase options to hedge its receivable position.
Assuming that the spot rate in 90 days is $.71, what is the net
amount received from the currency option hedge? A) $219,000. B)
$222,000. C) $216,000. D) $213,000. ANSWER: C SOLUTION: ($.73 $.01)
300,000 = $216,000.
Chapter 11: Managing Transaction Exposure
14
33. FAB Corporation will need 200,000 Canadian dollars (C$) in
90 days to cover a payable position. Currently, a 90-day call
option with an exercise price of $.75 and a premium of $.01 is
available. Also, a 90-day put option with an exercise price of $.73
and a premium of $.01 is available. FAB plans to purchase options
to hedge its payable position. Assuming that the spot rate in 90
days is $.71, what is the net amount paid, assuming FAB wishes to
minimize its cost? A) $140,000. B) $148,000. C) $152,000. D)
$150,000. ANSWER: A SOLUTION: ($.71 $.01) 200,000 = $140,000. Note:
the call option is not exercised since the spot rate is less than
the exercise price. 34. You are the treasurer of Arizona
Corporation and must decide how to hedge (if at all) future
receivables of 350,000 Australian dollars (A$) 180 days from now.
Put options are available for a premium of $.02 per unit and an
exercise price of $.50 per Australian dollar. The forecasted spot
rate of the Australian dollar in 180 days is: Future Spot Rate $.46
$.48 $.52 Probability 20% 30% 50%
The 90-day forward rate of the Australian dollar is $.50. What
is the probability that the put option will be exercised (assuming
Arizona purchased it)? A) 0%. B) 80%. C) 50%. D) none of these.
ANSWER: C SOLUTION: Arizona will exercise when the exercise price
is greater than the future spot (20% + 30% = 50%).
35.
If interest rate parity exists, and transaction costs do not
exist, the money market hedge will yield the same result as the
_______ hedge. A) put option B) forward C) call option D) none of
these ANSWER: B
15 36.
International Financial ManagementWhich of the following is the
least effective way of hedging transaction exposure in the long
run? A) long-term forward contract. B) currency swap. C) parallel
loan. D) money market hedge. ANSWER: D
37.
When a perfect hedge is not available to eliminate transaction
exposure, the firm may consider methods to at least reduce
exposure, such as: A) leading. B) lagging. C) cross-hedging. D)
currency diversification. E) all of these. ANSWER: E
38.
To hedge a _______ in a foreign currency, a firm may _______ a
currency futures contract for that currency. A) receivable;
purchase B) payable; sell C) payable; purchase D) none of these
ANSWER: C
39.
A forward contract hedge is very similar to a futures contract
hedge, except that _______ contracts are commonly used for _______
transactions. A) forward; small B) futures; large C) forward; large
D) none of these ANSWER: C
40.
Celine Co. will need 500,000 in 90 days to pay for German
imports. Todays 90-day forward rate of the euro is $1.07. There is
a 40 percent chance that the spot rate of the euro in 90 days will
be $1.02, and a 60 percent chance that the spot rate of the euro in
90 days will be $1.09. Based on this information, the expected
value of the real cost of hedging payables is $_______. A) 35,000
B) 25,000 C) 1,000 D) 1,000 ANSWER: D SOLUTION: E[ RCH p ] =
$35,000 0.40 + $25,000 0.60 = $1,000
Chapter 11: Managing Transaction Exposure
16
41. 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. B) highly negative. C) zero.
D) none of these. ANSWER: C
42.
Samson Inc. needs 1,000,000 in 30 days. Samsong can earn 5
percent annualized on a German security. The current spot rate for
the euro is $1.00. Samson can borrow funds in the U.S. at an
annualized interest rate of 6 percent. If Samson uses a money
market hedge, how much should it borrow in the U.S.? A) $952,381.
B) $995,851. C) $943,396. D) $995,025. ANSWER: B SOLUTION:
1,000,000 /[1 + (5% 30 / 360)] = $995,851
43.
Blake Inc. needs 1,000,000 in 30 days. It can earn 5 percent
annualized on a German security. The current spot rate for the euro
is $1.00. Blake can borrow funds in the U.S. at an annualized
interest rate of 6 percent. If Blake uses a money market hedge to
hedge the payable, what is the cost of implementing the hedge? A)
$1,000,000. B) $1,055,602. C) $1,000,830. D) $1,045,644. ANSWER: C
SOLUTION: 1. Borrow $995,851 from a U.S. bank (1,000,000 $1.00 [1 +
(.05 30/360)] 2. 3. Convert $995,851 to 995,851, given the exchange
rate of $1.00 per euro. Use the euros to purchase a German security
that offers 0.42% interest over 30 days.
Repay the U.S. loan in 30 days, plus interest; the amount owed
is $1,000,830 (computed as $995,851 [1 + (.06 30/360)].
4.
17 44.
International Financial ManagementIf interest rate parity
exists, and transaction costs do not exist, the _______ hedge will
yield the same result as the _______ hedge. A) money market;
futures B) money market; options C) money market; forward D)
forward; options ANSWER: C
45.
To hedge a contingent exposure, in which an MNCs exposure is
contingent on a specific event occurring, the appropriate hedge
would be a(n) _______ hedge. A) money market B) futures C) forward
D) options ANSWER: D
46.A) B) C) D)
A _______ is not a technique for hedging long-term transaction
exposure. long-term forward contact long-term futures contract
currency swap parallel loan
ANSWER: B
47.A) B) C) D)
The _______ does not represent an obligation. long-term forward
contract currency swap parallel loan currency option
ANSWER: D 48. Sometimes the overall performance of an MNC may
already be insulated by offsetting effects between subsidiaries and
it may not be necessary to hedge the position of each individual
subsidiary. A) true. B) false. ANSWER: A 49. If an MNC is hedging
various currencies, it should measure the real cost of hedging in
each currency as a dollar amount for comparison purposes. A) true.
B) false. ANSWER: B
Chapter 11: Managing Transaction Exposure
18
50. Since the results of both a money market hedge and a forward
hedge are known beforehand, an MNC can implement the one that is
more feasible. A) true. B) false. ANSWER: A 51. Hedging the
position of individual subsidiaries is generally necessary, even if
the overall performance of the MNC is already insulated by the
offsetting positions between subsidiaries. A) true. B) false.
ANSWER: B 52. If an MNC is extremely risk-averse, it may decide to
hedge even though its hedging analysis indicates that remaining
unhedged will probably be less costly than hedging. A) true. B)
false. ANSWER: A 53. A money market hedge involves taking a money
market position to cover a future payables or receivables position.
A) true. B) false. ANSWER: A 54. To hedge a payable position with a
currency option hedge, an MNC would write a call option. A) true.
B) false. ANSWER: B
55.
MNCs generally do not need to hedge because shareholders can
hedge their own risk. A) true. B) false. ANSWER: B
56. Currency futures are very similar to forward contracts,
except that they are standardized and are more appropriate for
firms that prefer to hedge in smaller amounts. A) true. B) false.
ANSWER: A
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International Financial Management
57. To hedge payables with futures, an MNC would sell futures;
to hedge receivables with futures, an MNC would buy futures. A)
true. B) false. ANSWER: B
58.
When the real cost of hedging is positive, this implies that
hedging was more favorable than not hedging. A) true. B) false.
ANSWER: B
59. A futures hedge involves taking a money market position to
cover a future payables or receivables position. A) true. B) false.
ANSWER: B 60. If interest rate parity (IRP) exists, then the money
market hedge will yield the same result as the options hedge. A)
true. B) false. ANSWER: B 61. The price at which a currency put
option allows the holder to sell a currency is called the
settlement price. A) true. B) false. ANSWER: B 62. A put option
essentially represents two swaps of currencies, one swap at the
inception of the loan contract and another swap at a specified date
in the future. A) true. B) false. ANSWER: B 63. The hedging of a
foreign currency for which no forward contract is available with a
highly correlated currency for which a forward contract is
available is referred to as cross-hedging. A) true. B) false.
ANSWER: A
Chapter 11: Managing Transaction Exposure
20
64. The exact cost of hedging with call options (as measured in
the text) is not known with certainty at the time that the options
are purchased. A) true. B) false. ANSWER: A 65. The tradeoff when
considering alternative call options to hedge a currency position
is that an MNC can obtain a call option with a higher exercise
price, but would have to pay a higher premium. A) true. B) false.
ANSWER: B 66. When comparing the forward hedge to the options
hedge, the MNC can easily determine which hedge is more desirable,
because the cost of each hedge can be determined with certainty. A)
true. B) false. ANSWER: B 67. When comparing the forward hedge to
the money market hedge, the MNC can easily determine which hedge is
more desirable, because the cost of each hedge can be determined
with certainty. A) true. B) false. ANSWER: A