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| 1 | |
Suppose that your firm is a U.S.-based importer of German automobile accessories. You pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In one year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange rate is €1.00 = $1.20; the one-year forward rate is €1.00 = $1.15. How can you fix the dollar cost of this order? |
| | A) | Enter into long position in the one-year euro futures contract at €1.00 = $1.15. This will fix the cost of €100,000 at $115,000. |
| | B) | Enter into short position in the one-year euro futures contract at €1.00 = $1.15. This will fix the cost of €100,000 at $115,000. |
| | C) | Since the spot price is more than the forward price, you should trade your dollars for euros today and pay your supplier early. |
| | D) | Sell a call option on the euro with a one-year maturity. |
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| 2 | |
Suppose that your firm is a U.S.-based importer of German automobile accessories. You pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In one year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange rate is €1.00 = $1.20; the one-year rate of interest in the U.S. is 4 percent and in Germany it is 6%. How can you fix the dollar cost of this order? |
| | A) | Exchange $120,000 for €100,000 at today's spot rate. In twelve months, pay your supplier. |
| | B) | Exchange $113,208 for €94,340 at the spot rate of €1.00 = $1.20. Invest the euros at 6%. In one year your investment will be worth €100,000 which is enough to pay your supplier. If you're short of cash today, borrow the $113,208 at 4 percent. |
| | C) | Sell euros forward at the exchange rate expected to prevail in one year:
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| | D) | None of the above are correct. |
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| 3 | |
Suppose that your firm is U.S.-based importer of German automobile accessories. You pay for them in euros and sell them in dollars. You have just ordered next year's inventory. In one year your firm owes a payment of €100,000 to your German supplier. Today's spot exchange rate is €1.00 = $1.20; One-year call and put options are available on the euro with a variety of strike prices. How can you place an upper limit on the dollar cost of this order? |
| | A) | Buy one-year put options |
| | B) | Sell one-year put options |
| | C) | Sell one-year call options |
| | D) | Buy one-year call options |
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| 4 | |
Suppose a U.S. firm has just bought an asset from a Japanese firm for ¥500 million due in one year. Calculate today's cost (present value) of meeting this obligation using a money market hedge. The spot exchange rate for Japanese yen is ¥122/$ and the one year forward exchange rate for Japanese yen is ¥130/$. The one-year interest rate is 5% in the U.S. The one-year interest rate in Japan is 12.00% |
| | A) | $3,485,000 |
| | B) | $3,659,250 |
| | C) | $3,663,004 |
| | D) | $446,428,571 |
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| 5 | |
Explain the process of a money market hedge for a foreign currency obligation. |
| | A) | Estimate the size of your contractual foreign currency obligation in dollars using the forward rate. Find the present value of that using the U.S. dollar interest rate. Buy the present value of the foreign currency obligation at the spot exchange rate. Invest the proceeds at the foreign currency interest rate. |
| | B) | Estimate the size of your foreign currency obligation. Buy enough call options to meet this obligation. At maturity, exercise the calls. |
| | C) | Estimate the size of your contractual foreign currency obligation. Buy that much foreign currency at the spot rate, pay early. |
| | D) | Estimate the size and timing of your contractual foreign currency obligation. Find the present value of the obligation using the foreign currency discount rate. Buy the present value of the foreign currency obligation at the spot exchange rate. Invest the proceeds at the foreign currency interest rate. |
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| 6 | |
Suppose a U.S. firm has sold an airplane to a British firm for £20 million payable in one year. The spot exchange rate is $1.80 = £1.00; the one-year forward exchange rate is $1.60 = £1.00. The one-year interest rate in the U.S. is 5 percent and the one-year interest rate in Great Britain is 18 percent. Which of the following hedging strategies works? |
| | A) | Sell £20 million forward at $1.60 =£1.00 |
| | B) | Since the forward rate is less than the spot rate, use a money market hedge instead of a forward market hedge. |
| | C) | Borrow £16,949,152.54 from a British lender. Exchange for $30,508,474.58 at the spot exchange rate. In one year, the £20 million receivable will service the loan. |
| | D) | Both a) and c) are correct. |
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| 7 | |
A recurring exposure could be best be hedged with |
| | A) | Swaps |
| | B) | Exposure netting |
| | C) | Selling call options |
| | D) | Buying call options |
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| 8 | |
Today, it is not unusual for an exporter to let the importer choose the currency of payment. |
| | A) | This amounts to the exporter giving the importer an option. |
| | B) | The importer is essentially selling an option to the exporter. |
| | C) | This is an example of exposure netting. |
| | D) | This only works when neither party wishes to hedge. |
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| 9 | |
For an exporter selling in one foreign currency, if the domestic currency is strong or expected to become strong: |
| | A) | The firm can hedge by selling their home currency forward. |
| | B) | The firm could hedge by buying foreign currency forward. |
| | C) | a) and b) are both correct |
| | D) | The firm could hedge by buying their home currency forward. |
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| 10 | |
A firm that has an exposure to a minor currency, |
| | A) | Can hedge to the exposure to an extent using cross-hedging techniques. |
| | B) | Can directly hedge at no more expense than with a major currency. |
| | C) | Should never hedge since this could cost too much. |
| | D) | b) and c) are both correct. |
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