1. If you fear the dollar will rise against the Spanish peseta, but
with inflation the same in both countries, with a resulting adverse change
in the dollar value of the equity of your Spanish subsidiary, you can best
hedge
by
a) selling pesetas forward in the amount of net assets b) buying
pesetas forward in the amount of net assets
c) reducing the liabilities of the subsidiary d) selling pesetas
forward in the amount of total assets
e) none of the above
2. On March 1, Bechtel submits a franc-denominated bid on a project
in France. Bechtel will not learn until June 1 whether it has won the contract.
What is the most appropriate way for Bechtel to manage the exchange risk
on this contract?
a) sell the franc amount of the bid forward for U.S. dollars
b) buy French francs forward in the amount of the contract
c) buy a put option on francs in the amount of the franc exposure
d) sell a call option on francs in the amount of franc exposure
e) none of the above
3. A Japanese firm sells TV sets to an American importer for one billion
yen payable in 90 days. To protect against exchange risk, the importer
could a) borrow yen, convert to dollars, and lend dollars for
the interim period
b) sell yen on the forward market c) sell a call
option on yen d) buy a futures contract for yen on the futures
exchange
e) none of the above
4. Hedging cannot provide protection against "expected" exchange rate changes. Expected changes are those reflected in the market. a) true b) false
5. If you fear the dollar will rise against the French franc, with a
resulting adverse change in the dollar value of the equity of your French
subsidiary, you can hedge by a) selling francs forward in the amount
of net assets
b) buying francs forward in the amount of net assets c)
reducing the liabilities of the subsidiary
d) selling francs forward in the amount of total assets
e) none of the above
6a. According to the text a "soft" currency would be one that investors
expect to _________ in the near future.
a) appreciate b) depreciate
c) allowed to float. d) be backed by a currency board.
e) be taken off a gold standard
6b. The basic or "classic" hedging strategy involves a) reducing
soft currency assets b) increasing soft currency liabilities
c) both a and b d) none of the above
7. You expect to receive £500,000 90 days hence, suppose that the spot rate and the 90-day forward rate on the pound sterling are $1.35 and $1.30, respectively. Your company, wishing to avoid foreign exchange risk, sells £500,000 forward 90 days. Assuming that the spot rate remains the same 90 days hence, your company would (hint: was this hedge a good idea using 20/20 hindsight?) a) be glad it had hedged b) been unaffected by the hedge. c) have been better off not to have sold pounds forward d) unable to tell
8. Compaq Computer has a £1 million receivable that it expects
to collect in one year. Suppose the interest rate on pounds is 15%. How
could Compaq protect this receivable using a money market hedge?
(hint: don't forget that borrowing is not free)
a) borrow £1 million pounds today b) lend £1 million
pounds today c) borrow £869,565 pounds today
d) lend £986,754 pounds today e) none of the above
9. Suppose PPP holds, markets are efficient, there are no taxes, and
relative prices remain constant. In such a world,
a) hedging can still be of value b) exchange risk management
remains of vital concern c) both a and b are correct
d) exchange risk is nonexistent e) none of the above
10. American Airlines hedges a £2.5 million receivable by selling
pounds forward. If the spot rate is £1 = $1.73 and the 90-day forward
rate is $1.7158, what is American's actual true cost of hedging?
a) $142,000 b) $35,500 c) $8,875 d) $33,176
e) it is unknown at the time American enters into its hedge
11. DEC is asked to quote a price in Belgian francs for computer sales
to a Belgian company. The computers will be paid for in four equal, quarterly
installments, beginning 90 days from now. DEC requires a minimum price
of $2.5 million to accept this contract. Suppose the spot and forward rates
for the Belgian franc are as follows:
| Spot | 90-Day | 180-Day | 270-Day | 360-Day |
| $0.0307 | $0.0302 | $0.0298 | $0.0293 | $0.0287 |
What is the minimum Belgian franc price that DEC should quote for this
order?
a) BF 82,781,457 b) BF 87,108,014 c) BF 81,433,225
d) BF 84,745,763 e) none of the above
12. Ford simultaneously borrows Spanish pesetas at 13% and invests the
proceeds converted dollars at 10%, both for one year. At the time Ford
enters into these transactions, the spot rate for the peseta is $0.095.
If the spot rate is Ptas. 1 = $0.087 in one year, what is the cost to Ford
of this money market hedge?
a) 2.0% b) 3.8% c) 1.3% d) Ford has a 6.5% gain,
not a cost
13. Suppose General Motors uses a money market hedge to protect an Lit
200 million payable due in one year. The U.S. interest rate at the time
of the hedge was 9% and the lira interest rate was 14%. If the spot rate
moved from Lit 1293 at the start of the year to Lit 1349 at the end of
the year, what was GM's cost of the money market hedge? (closest)
a) $3,647 b) $414 c) GM gained $1,069 d) GM gained
$5,631
SKIP 14. Du Pont has entered into a currency risk sharing arrangement with British Gas. Under the contract, Du Pont agrees to pay British Gas a base price of $10 million for gas purchases, but the parties would share the currency risk equally beyond a neutral zone, specified as a band of exchange rates: $1.67-1.73:£1. Within the neutral zone, Du Pont must pay BG the pound equivalent of $10 million at the base rate of $1.70. Suppose the spot rate at the time of payment is £1 = $1.63. How much will Du Pont owe British Gas? a) $10 million b) $9,702,381 c) $9,588,235 d) $9,819,277
The following information is to be used in answering questions 15-17.
U.S. borrowing rate for 1 year = 9.5%
U.S. deposit rate for 1 year = 8.7%
French borrowing rate for 1 year = 11.3%
French deposit rate for 1 year = 10.2%
French franc spot quote = $0.1763-78
French franc 1-year forward quote = $0.1729-47 (note
the bid-ask prices)
15. What value can Alcoa lock in for a receivable of FF 3 million due in one year if it executes a money market hedge today? The dollar amount is in future dollars. a) $525,540 b) $516,545 c) $530,012 d) $520,940
16. What value can Alcoa lock in for its FF 3 million receivable if
it executes a forward contract today?
a) $518,700 b) $524,100 c) $528,900 d) $532,410
17a. Suppose Alcoa has a payable of FF 1 million due in one year. Alcoa's locked-in cost of the payable using a money market hedge is a) $173,900; b) $174,925; c) $176,671; d) $178,937;
17b. Suppose Alcoa has a payable of FF 1 million due in one year. Alcoa's locked- in cost of the payable using a forward hedge is a) $177,470 b) $176,300 c) $172,900 d) $174,700
Remember: the locked-in cost (from a forward or spot hedge) is not what we mean by the true cost of the hedge: the true (or eventual)cost of the hedge is only known AFTER LEARNING THE FUTURE SPOT PRICE. Again, if in hindsight the hedge was a bad idea then the hedge was costly.
18. Suppose Pepsico hedges a ¥1 billion dividend it expects to receive from its Japanese subsidiary in 90 days with a forward contract. The current spot rate is ¥150/$1 and the 90-day forward rate is ¥149/$1. If the spot rate in 90 days is ¥154/$, how much has this forward market hedge cost Pepsico? a) Pepsi gains $173,160 from the forward contract b) Pepsi gains $217,903 from the forward contract c) Pepsi neither gains nor loses
19. Goodyear has operations in both Germany and Switzerland. In
spite of the fact that the Swiss unit is not in the Euro system,
the SwF and Deutsche mark are highly correlated in their movements against
the U.S. dollar. If the Swiss unit has net inflows of SwFs and the German
unit has net inflows of DM, then Goodyear's combined transaction exposure
a) approximately equals the sum of its SwF and DM exposures
b) is less than the sum of its SwF and DM exposures because the currencies
are highly correlated c) is less than the sum of its
SwF and DM exposures because of diversification d) b
and c e) none of the above (don't worry about
this one)
20. DEC hedges a FF 3.2 million receivable due in 180 days. The current spot rate is FF 1 = $0.18834 and the 180-day forward rate is FF 1 = $0.18625. If the spot rate at the end of 180 days is $0.18728, how much has the forward market hedge cost DEC? a) $6,688 b) $3,392 c) $3,296 d) DEC gains $6,688 on the hedge
1. a 2. c 3. d 4. a 5.a 6a. b 6b. c 7. c 8. c 9. c 10. e 11. b
12. d 13. b. 14. b 15. b 16. a 17a. c 17b. d 18. b 19. c 20. c