Chapter-8-Practice-Questions-and-Answer-Keys-(upda

Lecture#7–PracticeQuestions–InternationalFinancialManagement456Chapter8–ManagementofTransactionExposure1.TransactionexposureisdefinedasA.thesensitivityofrealizeddomesticcurrencyvaluesofthefirm'scontractualcashflowsdenominatedinforeigncurrenciestounexpectedexchangeratechanges.B.theextenttowhichthevalueofthefirmwouldbeaffectedbyunanticipatedchangesinexchangerate.C.thepotentialthatthefirm'sconsolidatedfinancialstatementcanbeaffectedbychangesinexchangerates.D.expostandexantecurrencyexposures.2.ThemostdirectandpopularwayofhedgingtransactionexposureisbyA.exchange-tradedfuturesoptions.B.currencyforwardcontracts.C.foreigncurrencywarrants.D.borrowingandlendinginthedomesticandforeignmoneymarkets.3.Ifyouoweaforeigncurrencydenominateddebt,youcanhedgewithA.alongpositioninacurrencyforwardcontract.B.alongpositioninanexchange-tradedfuturesoption.C.buyingtheforeigncurrencytodayandinvestingitintheforeigncounty.D.botha)andc)4.WithanyhedgeA.yourlossesononesideshouldaboutequalyourgainsontheotherside.B.youshouldtrytomakemoneyonbothsidesofthetransaction:thatwayyoumakemoneycomingandgoing.C.youshouldspendatleastasmuchtimeworkingthehedgeasworkingtheunderlyingdealitself.D.youshouldagreetoanythingyourbankerputsinfrontofyourface.5.ThechoicebetweenaforwardmarkethedgeandamoneymarkethedgeoftencomesdowntoA.interestrateparity.B.optionpricing.C.flexibilityandavailability.D.noneoftheabove6.SupposethatBoeingCorporationexportedaBoeing747toLufthansaandbilled€10millionpayableinoneyear.Themoneymarketinterestratesandforeignexchangeratesaregivenasfollows:Theeurozoneone-yearinterestrate:9.00%perannum;TheU.S.one-yearinterestrate:6.10%perannum;Thespotexchangerate:1.50dollarpereuro;Theone-yearforwardexchangerate:1.46dollarpereuro.AssumethatBoeingsellsacurrencyforwardcontractof€10millionfordeliveryinoneyear,inexchangeforapredeterminedamountofU.S.dollar.Supposethatonthematuritydateoftheforwardcontract,thespotrateturnsouttobe$1.40/€(i.e.lessthantheforwardrateof$1.46/€).Whichofthefollowingistrue?A.Boeingwouldhavereceivedonly$14.0million,ratherthan€14.6million,haditnotenteredintotheforwardcontractB.Boeinggained$0.6millionfromforwardhedgingC.a)andb)D.noneoftheabove7.YourfirmhasaBritishcustomerthatiswillingtoplacea$1millionorder,butwantstopayinpoundsinsteadofdollars.Thespotexchangerateis$1.85=£1.00andtheone-yearforwardrateis$1.90=£1.00.Theleadtimeontheorderissuchthatpaymentisdueinoneyear.Whatisthefairestexchangeratetouse?A.$1.85=£1.00B.$1.8750=£1.00C.$1.90=£1.00D.noneoftheabove8.YourfirmisaU.K.-basedexporterofBritishbicycles.YouhavesoldanordertoanAmericanfirmfor$1,000,000worthofbicycles.PaymentfromtheAmericanfirm(inU.S.dollars)isdueinsixmonths.Detailastrategyusingfuturescontractsthatwillhedgeyourexchangeraterisk.A.Goshort12six-monthforwardcontracts;pay£555,600.B.Goshort9six-monthforwardcontracts.Raiseapproximately£537,600.C.Golong12six-monthforwardcontracts.Receiveapproximately£549,500.D.Golong16six-monthforwardcontracts;raiseapproximately£537,600.9.AU.S.firmhassoldanItalianfirm€1,000,000worthofproduct.InoneyeartheU.S.firmgetspaid.Tohedge,theU.S.firmboughtputoptionsontheeurowithastrikepriceof$1.65.Theypaidanoptionpremium$0.01pereuro.Ifatmaturity,theexchangerateis$1.60,A.thefirmwillrealize$1,145,000onthesalenetofthecostofhedging.B.thefirmwillrealize$1,150,000onthesalenetofthecostofhedging.C.thefirmwillrealize$1,640,000onthesalenetofthecostofhedging.D.noneoftheabove10.BuyingacurrencyoptionprovidesA.aflexiblehedgeagainstexchangeexposure.B.limitsthedownsideriskwhilepreservingtheupsidepotential.C.aright,butnotanobligation,tobuyorsellacurrency.D.alloftheabove11.AJapaneseEXPORTERhasa€1,000,000receivabledueinoneyear.Detailastrategyusingoptionsthatwilleliminateexchangeraterisk.A.Buy16putoptionsoneuro,sell10calloptionsonyen.B.Buy16putoptionsoneuro,buy10calloptionsonyen.C.Sell16calloptionsoneuro,buy10putoptionsonyen.D.Noneoftheabove12.Tohedgeaforeigncurrencypayable,A.buycalloptionsontheforeigncurrency.B.buyputoptionsontheforeigncurrency.C.sellcalloptionsontheforeigncurrency.D.sellputoptionsontheforeigncurrency.13.Tohedgeaforeigncurrencyreceivable,A.buycalloptionsontheforeigncurrencywithastrikeinthedomesticcurrency.B.buyputoptionsontheforeigncurrencywithastrikeinthedomesticcurrency.C.sellcalloptionsontheforeigncurrencywithastrikeinthedomesticcurrency.D.sellputoptionsontheforeigncurrencywithastrikeinthedomesticcurrency.14.XYZCorporation,locatedintheUnitedStates,hasanaccountspayableobligationof¥750millionpayableinoneyeartoabankinTokyo.Thecurrentspotrateis¥116/$1.00andtheoneyearforwardrateis¥109/$1.00.Theannualinterestrateis3percentinJapanand6percentintheUnitedStates.XYZcanalsobuyaone-yearcalloptiononyenatthestrikepriceof$0.0086peryenforapremiumof0.012centperyen.ThefuturedollarcostofmeetingthisobligationusingthemoneymarkethedgeisA.$6,450,000.B.$6,545,400.C.$6,653,833.D.$6,880,734.15.Acalloptionon£1,000withastrikepriceof€1,250isequivalenttoA.aputoptionon€1,250withanexercisepriceof€1,000.B.aportfolioofoptions:aputon€1,250withastrikepriceindollarsplusacallon£1,000withastrikepri