Chapter 08 Management of Transaction Exposure

Student: ___________________________________________________________________________

1. Transaction exposure is defined as

A. the sensitivity of realized domestic currency values of the firm's contractual cash flows
denominated in foreign currencies to unexpected exchange rate changes.
B. the extent to which the value of the firm would be affected by unanticipated changes in
exchange rate.
C. the potential that the firm's consolidated financial statement can be affected by changes in
exchange rates.
D. ex post and ex ante currency exposures.

2. The most direct and popular way of hedging transaction exposure is by

A. exchange-traded futures options.

B. currency forward contracts.
C. foreign currency warrants.
D. borrowing and lending in the domestic and foreign money markets.

3. If you have a long position in a foreign currency, you can hedge with:

A. A short position in an exchange-traded futures option

B. A short position in a currency forward contract
C. A short position in foreign currency warrants
D. Borrowing (not lending) in the domestic and foreign money markets

4. If you owe a foreign currency denominated debt, you can hedge with

A. a long position in a currency forward contract.

B. a long position in an exchange-traded futures option.
C. buying the foreign currency today and investing it in the foreign county.
D. both a and c
5. If you own a foreign currency denominated bond, you can hedge with

A. a long position in a currency forward contract.

B. a long position in an exchange-traded futures option.
C. buying the foreign currency today and investing it in the foreign county.
D. a swap contract where pay the cash flows of the bond in exchange for dollars.

6. The sensitivity of "realized" domestic currency values of the firm's contractual cash flows
denominated in foreign currency to unexpected changes in the exchange rate is

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above

7. The sensitivity of the firm's consolidated financial statements to unexpected changes in the
exchange rate is

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above

8. The extent to which the value of the firm would be affected by unexpected changes in the
exchange rate is

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above

9. With any hedge

A. your losses on one side should about equal your gains on the other side.
B. you should try to make money on both sides of the transaction: that way you make money
coming and going.
C. you should spend at least as much time working the hedge as working the underlying deal
itself.
D. you should agree to anything your banker puts in front of your face.
10. With any successful hedge

A. you are guaranteed to lose money on one side.

B. you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
C. both a and b
D. none of the above

11. The choice between a forward market hedge and a money market hedge often comes down to

A. interest rate parity.

B. option pricing.
C. flexibility and availability.
D. none of the above

12. Since a corporation can hedge exchange rate exposure at low cost

A. there is no benefit to the shareholders in an efficient market.

B. shareholders would benefit from the risk reduction that hedging offers.
C. the corporation's banker would benefit from the risk reduction that hedging offers.
D. none of the above

13. A CFO should be least worried about

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above

14. Exchange rate risk of a foreign currency payable is an example of

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above

15. A stock market investor would pay attention to

A. anticipated changes in exchange rates that have been already discounted and reflected in the
firm's value.
B. unanticipated changes in exchange rates that have not been discounted and reflected in the
firm's value.
16. Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million
payable in one year. The money market interest rates and foreign exchange rates are given as
follows:

Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in
exchange for a predetermined amount of U.S. dollar. Which of the following is (or are) true?
On the maturity date of the contract Boeing will:

(i) have to deliver €10 million to the bank (the counterparty of the forward contract)
(ii) take delivery of $14.6 million
(iii) have a zero net pound exposure
(iv) have a profit, or a loss, depending on the future changes in the exchange rate, from this
British sale

A. (i) and (iv)

B. (ii) and (iv)
C. (ii), (iii), and (iv)
D. (i), (ii), and (iii)

17. Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million
payable in one year. The money market interest rates and foreign exchange rates are given as
follows:

Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in
exchange for a predetermined amount of U.S. dollars. Suppose that on the maturity date of the
forward contract, the spot rate turns out to be $1.40/€ (i.e. less than the forward rate of $1.46/€).
Which of the following is true?

A. Boeing would have received only $14.0 million, rather than €14.6 million, had it not entered
into the forward contract
B. Boeing gained $0.6 million from forward hedging
C. a and b
D. none of the above
18. Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an Italian firm for
€1,000,000 worth of bicycles. Payment from the Italian firm (in €) is due in twelve months. Your
firm wants to hedge the receivable into pounds. Not dollars. Use the following table for exchange
rate data.

Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an
estimate of how many contracts of what type.

A. Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable.
Convert €970,873.79 to dollars at spot, receive $1.165.048,54. Convert dollars to pounds at
spot, receive £728.155.34.
B. Sell €1m forward using 16 contracts at $1.20 per €1. Buy £750,000 forward using 12 contracts
at $1.60 per £1.
C. Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.
D. Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1. Buy £750,000 forward
using 12 contracts at the forward rate of $1.72 per £1.
19. A Japanese EXPORTER has a €1,000,000 receivable due in one year. Spot and forward
exchange rate data is given in the table:

The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using
forward contracts that will hedge exchange rate risk.

A. Borrow €970,873.79 today; in one year you owe €1m, which will be financed with the
receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to
yen at spot, receive ¥116,504,854.
B. Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1. Buy ¥150,000,000
forward using 11.52 contracts, at the forward rate of $1.00 = ¥120.
C. Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1. Buy ¥150,000,000
forward using 12 contracts, at the forward rate of $1.00 = ¥120.
D. None of the above

20. Your firm has a British customer that is willing to place a $1 million order, but wants to pay in
pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year forward rate
is $1.90 = £1.00. The lead time on the order is such that payment is due in one year. What is the
fairest exchange rate to use?

A. $1.85 = £1.00
B. $1.8750 = £1.00
C. $1.90 = £1.00
D. none of the above

21. Your firm has a British customer that is willing to place a $1 million order (with payment due in 6
months), but insists upon paying in pounds instead of dollars.

A. The customer essentially wants you to discount your price by the value of a put option on
pounds.
B. The customer essentially wants you to discount your price by the value of a call option on
pounds.
C. None of the above
22. Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an American firm
for $1,000,000 worth of bicycles. Payment from the American firm (in U.S. dollars) is due in six
months. Detail a strategy using futures contracts that will hedge your exchange rate risk.

A. Go short 12 six-month forward contracts; pay £555,600.

B. Go short 16 six-month forward contracts. Pay approximately £537,600.
C. Go long 12 six-month forward contracts. Receive approximately £549,500.
D. Go long 16 six-month forward contracts; raise approximately £537,600.

23. Your firm is a U.S.-based exporter of bicycles. You have sold an order to a French firm for
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in three months.
Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an
estimate of how many contracts of what type and how much (in $) your firm will have.

A. Go short 12 six-month forward contracts; pay $1,290,000.

B. Go short 16 six-month forward contracts. Pay $1,230,000.
C. Go long 16 six-month forward contracts; raise $1,230,000.
D. Go long 12 six-month forward contracts. Receive $1,230,000.
24. Your firm is a U.K.-based exporter of bicycles. You have sold an order to a French firm for
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in 12 months. Detail
a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of
how many contracts of what type and maturity.

A. Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
B. Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
C. Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
D. Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
E. None of the above
25. Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm for
€1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Detail a strategy using
futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
B. Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
C. Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
D. Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
E. None of the above
26. Your firm is a Swiss exporter of bicycles. You have sold an order to a French firm for €1,000,000
worth of bicycles. Payment from the French firm (in euro) is due in 12 months. Detail a strategy
using futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go short 100 12-month euro futures contracts; and short 160 12-month SFr. futures contracts.
B. Go long 100 12-month € futures contracts; and long 160 12-month SFr. futures contracts.
C. Go long 100 12-month euro futures contracts; and short 160 12-month Swiss Franc futures
contracts.
D. Go short 100 12-month euro futures contracts; and long 160 12-month Swiss Franc futures
contracts.
E. None of the above
27. Your firm is a Swiss importer of bicycles. You have placed an order with an Italian firm for
€1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Detail a strategy using
futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go short 100 12-month euro futures contracts; and short 160 12-month SFr. futures contracts.
B. Go long 100 12-month € futures contracts; and long 160 12-month SFr. futures contracts.
C. Go long 100 12-month euro futures contracts; and short 160 12-month Swiss Franc futures
contracts.
D. Go short 100 12-month euro futures contracts; and long 160 12-month Swiss Franc futures
contracts.
E. None of the above
28. Your firm is an Italian exporter of bicycles. You have sold an order to a British firm for £1,000,000
worth of bicycles. Payment from the customer (in pounds sterling) is due in 12 months. Detail a
strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and maturity.

A. Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.
B. Go short 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts.
C. Go long 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts.
D. Go short 100 12-month pound futures contracts; and long 125 12-month euro futures
contracts.
E. None of the above
29. Your firm is an Italian importer of bicycles. You have placed an order with a British firm for
£1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Detail a strategy
using futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.
B. Go short 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts.
C. Go long 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts.
D. Go short 100 12-month pound futures contracts; and long 125 12-month euro futures
contracts.
E. None of the above
30. Your firm is a U.K.-based exporter of bicycles. You have sold an order to a Swiss firm for SFr.
1,000,000 worth of bicycles. Payment from the Swiss firm (in Swiss francs) is due in 12 months.
Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an
estimate of how many contracts of what type and maturity.

A. Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures
contracts.
B. Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures
contracts.
C. Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures
contracts.
D. Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures
contracts.
E. None of the above
31. Your firm is a U.K.-based importer of bicycles. You have placed an order with a Swiss firm for
SFr. 1,000,000 worth of bicycles. Payment (in Swiss francs) is due in 12 months. Detail a strategy
using futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures
contracts.
B. Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures
contracts.
C. Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures
contracts.
D. Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures
contracts.
E. None of the above
32. Your firm is a Swiss exporter of bicycles. You have sold an order to a British firm for £1,000,000
worth of bicycles. Payment from the British firm (in pounds sterling) is due in 12 months. Detail a
strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and maturity.

A. Go short 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts.
B. Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures contracts.
C. Go short 100 12-month pound futures contracts; and short 200 12-month SFr. futures
contracts.
D. Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts.
E. None of the above
33. Your firm is a Swiss importer of bicycles. You have placed an order with a British firm for
£1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Detail a strategy
using futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go short 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts.
B. Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures contracts.
C. Go short 100 12-month pound futures contracts.
D. Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts.
E. None of the above
34. Your firm is an Italian exporter of bicycles. You have sold an order to a Swiss firm for SFr.
2,000,000 worth of bicycles. Payment from the customer (in Swiss francs) is due in 12 months.
Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an
estimate of how many contracts of what type and maturity.

A. Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures
contracts.
B. Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures
contracts.
C. Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures
contracts.
D. Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures
contracts.
E. None of the above
35. Your firm is an Italian importer of bicycles. You have placed an order with a Swiss firm for SFr.
2,000,000 worth of bicycles. Payment (in francs) is due in 12 months. Detail a strategy using
futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures
contracts.
B. Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures
contracts.
C. Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures
contracts.
D. Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures
contracts.
E. None of the above
36. Your firm is a U.K.-based exporter of bicycles. You have sold an order to a French firm for
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in 12 months. Use a
money market hedge to redenominate this one-year receivable into a pound-denominated
receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. £803,721.49
B. €800,000
C. £780,312.13
D. £72,352.94

37. Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm for
€1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Use a money market hedge
to redenominate this one-year receivable into a pound-denominated receivable with a one-year
maturity.

The following were computed without rounding. Select the answer closest to yours.

A. £803,721.49
B. €800,000
C. £780,312.13
D. £72,352.94
38. Your firm is a Swiss exporter of bicycles. You have sold an order to a French firm for €1,000,000
worth of bicycles. Payment from the French firm (in euro) is due in 12 months. Use a money
market hedge to redenominate this one-year receivable into a Swiss franc-denominated
receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. SFr. 1,728,900.26
B. SFr. 1,600,000
C. SFr. 1,544,705.88
D. SFr. 800,000

39. Your firm is a Swiss importer of bicycles. You have placed an order with an Italian firm for
€1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Use a money market hedge
to redenominate this one-year receivable into a Swiss franc-denominated receivable with a one-
year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. SFr. 1,728,900.26
B. SFr. 1,600,000
C. SFr. 1,544,705.88
D. SFr. 800,000
40. Your firm is an Italian exporter of bicycles. You have sold an order to a British firm for £1,000,000
worth of bicycles. Payment from the customer (in pounds sterling) is due in 12 months. Use a
money market hedge to redenominate this one-year receivable into a euro-denominated
receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. €1,225,490.20
B. €1,244,212.10
C. €1,250,000
D. €1,219,815.78

41. Your firm is an Italian importer of British bicycles. You have placed an order with a British firm for
£1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Use a money
market hedge to redenominate this one-year receivable into a euro-denominated receivable with
a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. €1,225,490.20
B. €1,244,212.10
C. €1,250,000
D. €1,219,815.78
42. Your firm is a U.K.-based exporter of bicycles. You have sold an order to a Swiss firm for SFr.
1,000,000 worth of bicycles. Payment from the Swiss firm (in Swiss francs) is due in 12 months.
Use a money market hedge to redenominate this one-year receivable into a euro-denominated
receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. £500,000
B. £464,874.41
C. £446,730.77
D. £509,900.99

43. Your firm is a U.K.-based importer of bicycles. You have placed an order with a Swiss firm for
SFr. 1,000,000 worth of bicycles. Payment (in Swiss francs) is due in 12 months. Use a money
market hedge to redenominate this one-year receivable into a euro-denominated receivable with
a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. £500,000
B. £464,874.41
C. £446,730.77
D. £509,900.99
44. Your firm is a Swiss exporter of bicycles. You have sold an order to a British firm for £1,000,000
worth of bicycles. Payment from the British firm (in pounds sterling) is due in 12 months. Use a
money market hedge to redenominate this one-year receivable into a euro-denominated
receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. SFr. 2,000,000
B. SFr. 2,151,118.62
C. SFr. 2,068,383.28
D. SFr. 1,921,941.75

45. Your firm is a Swiss importer of bicycles. You have placed an order with a British firm for
£1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Use a money
market hedge to redenominate this one-year pound denominated payable into a Swiss franc-
denominated payable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. SFr. 2,000,000
B. SFr. 2,151,118.62
C. SFr. 2,068,383.28
D. SFr. 1,921,941.75
46. Your firm is an Italian exporter of bicycles. You have sold an order to a Swiss firm for SFr.
2,000,000 worth of bicycles. Payment from the customer (in Swiss francs) is due in 12 months.
Use a money market hedge to redenominate this one-year franc denominated receivable into a
euro-denominated receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. €1,116,826.92
B. €1,250,000
C. €1,134,122.29
D. €1,156,804.73

47. Your firm is an Italian importer of bicycles. You have placed an order with a Swiss firm for SFr.
2,000,000 worth of bicycles. Payment (in francs) is due in 12 months. Use a money market hedge
to redenominate this one-year franc denominated payable into a euro-denominated payable with
a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. €1,116,826.92
B. €1,250,000
C. €1,134,122.29
D. €1,156,804.73

48. From the perspective of a corporate CFO, when hedging a payable versus a receivable

A. credit risk considerations are more germane for a payable.

B. credit risk considerations are more germane for a receivable.
C. none of the above
49. Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an Italian firm for
€1,000,000 worth of bicycles. Payment from the Italian firm (in €) is due in twelve months. Your
firm wants to hedge the receivable into pounds. Not dollars. Interest rates are 3% in €, 2% in $
and 4% in £.

Detail a strategy using spot exchange rates and borrowing or lending that will hedge your
exchange rate risk.

A. Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable.
Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to pounds at
spot, receive £728,155.34.
B. Sell €1m forward using 16 contracts at $1.20 per €1. Buy £750,000 forward using 12 contracts
at $1.60 per £1.
C. Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1. Buy £750,000 forward
using 12 contracts at the forward rate of $1.72 per £1.
D. None of the above
50. A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail a strategy using a
money market hedge that will eliminate any exchange rate risk.

A. Borrow €970,873.79 today. Convert the euro to dollars at the spot exchange rate, receive
$1,165,048.54. Convert these dollars to yen at the spot rate, receive ¥.
B. Borrow €943,396.22 today. Convert the euro to dollars at the spot exchange rate, convert
these dollars to yen at the spot rate, receive ¥117,924,528.30.
C. Lend €943,396.22 today. Convert the euro to dollars at the spot exchange rate, convert these
dollars to yen at the spot rate.
D. Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate;
lend €943,396.22 at 5.25%.

51. A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the U.S. firm gets
paid. To hedge, the U.S. firm bought put options on the euro with a strike price of $1.65. They
paid an option premium $0.01 per euro. If at maturity, the exchange rate is $1.60,

A. the firm will realize $1,145,000 on the sale net of the cost of hedging.
B. the firm will realize $1,150,000 on the sale net of the cost of hedging.
C. the firm will realize $1,140,000 on the sale net of the cost of hedging.
D. none of the above

52. Buying a currency option provides

A. a flexible hedge against exchange exposure.

B. limits the downside risk while preserving the upside potential.
C. a right, but not an obligation, to buy or sell a currency.
D. all of the above
53. Which of the following options strategies are internally consistent?

A. Sell puts and buy calls

B. Buy puts and sell calls
C. Buy puts and buy calls
D. Both a and b

54. A Japanese EXPORTER has a €1,000,000 receivable due in one year.

Detail a strategy using options that will eliminate exchange rate risk.

A. Buy 16 put options on euro, sell 10 call options on yen.

B. Buy 16 put options on euro, buy 10 call options on yen.
C. Sell 16 call options on euro, buy 10 put options on yen.
D. None of the above

55. A Japanese EXPORTER has a €1,000,000 receivable due in one year.

Estimate the cost today of an options strategy that will eliminate exchange rate risk.

A. $20,000
B. $5,000
C. $12,500
D. None of the above
56. A Japanese IMPORTER has a $1,250,000 PAYABLE due in one year.

Detail a strategy using forward contracts that will hedge his exchange rate risk.

A. Go short in 12 yen forward contracts.

B. Go long in 12 yen forward contracts.
C. Go short in 16 yen forward contracts.
D. None of the above

57. A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year.

The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using
forward contracts that will hedge his exchange rate risk. Have an estimate of how many contracts
of what type.

A. Go short in 12 yen forward contracts. Go long in 16 euro contracts.

B. Go long in 12 yen forward contracts. Go short in 16 euro contracts.
C. Go short in 16 yen forward contracts. Go long in 12 euro contracts.
D. None of the above

58. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million
payable in one year to a bank in Tokyo. Which of the following is NOT part of a money market
hedge?

A. Buy the ¥750 million at the forward exchange rate.

B. Find the present value of ¥750 million at the Japanese interest rate.
C. Buy that much yen at the spot exchange rate.
D. Invest in risk-free Japanese securities with the same maturity as the accounts payable
obligation.
59. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million
payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year
forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the
United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per
yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this obligation using
the money market hedge is

A. $6,450,000.
B. $6,545,400.
C. $6,653,833.
D. $6,880,734.

60. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million
payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year
forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the
United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per
yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this obligation using
the forward hedge is

A. $6,450,000.
B. $6,545,400.
C. $6,653,833.
D. $6,880,734.

61. To hedge a foreign currency payable,

A. buy call options on the foreign currency.

B. buy put options on the foreign currency.
C. sell call options on the foreign currency.
D. sell put options on the foreign currency.

62. To hedge a foreign currency receivable,

A. buy call options on the foreign currency with a strike in the domestic currency.
B. buy put options on the foreign currency with a strike in the domestic currency.
C. sell call options on the foreign currency with a strike in the domestic currency.
D. sell put options on the foreign currency with a strike in the domestic currency.
63. A call option on £1,000 with a strike price of €1,250 is equivalent to

A. a put option on €1,250 with an exercise price of €1,000.

B. a portfolio of options: a put on €1,250 with a strike price in dollars plus a call on £1,000 with a
strike price in dollars.
C. a put option on £1,000 with an exercise price of €1,250.
D. both a and b

64. A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to

A. a put option to sell $18,000 at a strike price of $1.80 = £1.00.

B. a call option on $18,000 at a strike price of $1.80 = £1.00.
C. a put option on £10,000 at a strike price of $1.80 = £1.00.
D. none of the above

65. A put option to sell $18,000 at a strike price of $1.80 = £1.00 is equivalent to

A. a call option to buy £10,000 at a strike price of $1.80 = £1.00.

B. a call option on $18,000 at a strike price of $1.80 = £1.00.
C. a put option on £10,000 at a strike price of $1.80 = £1.00.
D. none of the above

66. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million
payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year
forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the
United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per
yen for a premium of 0.012 cent per yen. Assume that the forward rate is the best predictor of the
future spot rate. The future dollar cost of meeting this obligation using the option hedge is

A. $6,450,000.
B. $6,545,400.
C. $6,653,833.
D. $6,880,734.

67. Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge
your liability?

A. Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K. at i£.
B. Buy a call option on £100,000 with a strike price in dollars.
C. Take a long position in a forward contract on £100,000 with a 3-month maturity.
D. All of the above
68. Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge
your liability?

A. Buy a call option on £100,000 with a strike price in euro.

B. Buy a put option on £100,000 with a strike price in dollars.
C. Buy a call option on £100,000 with a strike price in dollars.
D. None of the above

69. Suppose that the exchange rate is €1.25 = £1.00.

Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00.
Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike
prices of €1.25 = £1.00.
For a U.K. firm to hedge a €100,000 payable,

A. buy 10 call options on the euro with a strike in pounds sterling.

B. buy 8 put options on the pound with a strike in euro.
C. sell 10 call options on the euro with a strike in pounds sterling.
D. sell 8 put options on the pound with a strike in euro.
E. both a and b
F. both c and d

70. Suppose that the exchange rate is €1.25 = £1.00.

Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00. Options (calls and puts) are available on the Frankfurt exchange in units
of £10,000 with strike prices of €1.25 = £1.00. For a U.K. firm to hedge a €100,000 receivable,

A. buy 10 call options on the euro with a strike in pounds sterling.

B. buy 8 put options on the pound with a strike in euro.
C. buy 10 put options on the euro with a strike in pounds sterling.
D. buy 8 call options on the pound with a strike in euro.
E. both a and b
F. both c and d
71. Suppose that the exchange rate is €1.25 = £1.00.
Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike
prices of $1.60/€1.00.
Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike
prices of $2.00/£1.00.
For a U.S. firm to hedge a €100,000 payable,

A. buy 10 call options on the euro with a strike in dollars.

B. buy 8 put options on the pound with a strike in dollars.
C. sell 10 call options on the euro with a strike in dollars.
D. sell 8 put options on the pound with a strike in dollars.
E. both a and b
F. both c and d

72. Suppose that the exchange rate is €1.25 = £1.00.

Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike
prices of $1.60/€1.00.
Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike
prices of $2.00/£1.00.
For a U.S. firm to hedge a €100,000 receivable,

A. buy 10 call options on the euro with a strike in dollars.

B. buy 10 put options on the pound with a strike in dollars.
C. sell 10 call options on the euro with a strike in dollars.
D. sell 8 put options on the pound with a strike in dollars.
E. both a and b
F. both c and d

73. Suppose that $2 = £1, $1.60 = €1, and the cross exchange rate is €1.25 = £1.00. If you own a call
option on £10,000 with a strike price of $1.50, you would exercise this option at maturity if

A. the $/£ exchange rate is at least $1.60/£.

B. the $/€ exchange rate is at least $1.60/€.
C. the €/£ exchange rate is at least €1.25/£.
D. none of the above
74. Suppose that the exchange rate is €1.25 = £1.00.
Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00.
Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike
prices of €1.25 = £1.00.
For an Italian firm to hedge a £100,000 payable,

A. buy 10 call options on the pound with a strike in euro.

B. buy 8 put options on the euro with a strike in pounds.
C. both a and b will work.
D. simultaneously use strategies a and b
E. none of the above

75. Suppose that the exchange rate is €1.25 = £1.00.

Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00. Options (calls and puts) are available on the Frankfurt exchange in units
of £10,000 with strike prices of €1.25 = £1.00. For a French firm to hedge a £100,000 receivable,

A. buy 10 call options on the pound with a strike in euro.

B. buy 8 put options on the pound with a strike in euro.
C. buy 10 put options on the pound with a strike in euro.
D. buy 8 call options on the euro with a strike in pounds.
E. both a and b
F. both c and d

76. A minor currency is

A. anything other than the "big six": U.S. dollar, British pound, Japanese yen, euro, Canadian
dollar, and Swiss franc.
B. any currency that trades at less than one U.S. dollar.
C. any currency that is less than a $20 denomination.
D. none of the above

77. A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with

A. forward contracts on the euro.

B. forward contracts on the ruble.
C. forward contracts on the pound.
D. forward contracts on the yen.
78. When cross-hedging,

A. try to find one asset that has a positive correlation with another asset.
B. the main thing is to find one asset that covaries with another asset in some predictable way.
C. try to find one asset that has a negative correlation with another asset.
D. none of the above

79. Your firm is bidding on a large construction contract in a foreign country. This contingent
exposure could best be hedged

A. with put options on the foreign currency.

B. with call options on the foreign currency.
C. both a and b, depending upon the specifics ("the rest of the story").
D. with futures contracts.

80. On a recent sale, Boeing allowed British Airways to pay either $18 million or £10 million.

A. At the due date, British airways will be indifferent between paying dollars or pounds since they
would of course have hedged their exposure either way.
B. Boeing has provided British Airways with a free option to buy $18 million with an exercise price
of £10 million.
C. Boeing has provided British Airways with a free option to sell up to £10 million with an exercise
price of $18 million.
D. All of the above

81. Contingent exposure can best be hedged with

A. options.
B. money market hedging.
C. futures.
D. all of the above

82. A 5-year swap contract can be viewed as a portfolio of 5 forward contracts with maturities of 1, 2,
3, 4 and 5 years. One important exception is that

A. the forward price is the same for the swap contract but not for the forward contracts.
B. the swap contract will have daily resettlement.
C. the forward contracts will have resettlement risk.
D. none of the above.
83. To find the swap rate for a 3-year swap, you would

A. take the arithmetic average of the 1-, 2-, and 3-year forward rates.
B. take the geometric average of the 1-, 2-, and 3-year forward rates.
C. bootstrap the LIBOR yield curve.
D. none of the above

84. Generally speaking, a firm with recurrent exposure can best hedge using which product?

A. Options
B. Swaps
C. Futures
D. All of the above

85. The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice
of paying a £10,000 bill due in 90 days with either £10,000 or €12,500.

A. The seller has given the buyer an at-the-money put option.

B. The seller has given the buyer an at-the-money call option.
C. Both a and b are correct
D. None of the above

86. The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice
of paying a £10,000 bill due in 90 days with either £10,000 or €12,500.

A. The seller has given the buyer an at-the-money put option on euro with a strike in pounds.
B. The seller has given the buyer an at-the-money put option on pounds with a strike in euro.
C. The seller has given the buyer an at-the-money call option on euro with a strike in pounds.
D. None of the above

87. An exporter can shift exchange rate risk to their customers by

A. invoicing in their home currency.

B. invoicing in their customer's local currency.
C. splitting the difference, and invoicing half of sales in local currency and half of sales in home
currency.
D. invoicing sales in a currency basket such as the SDR as the invoice currency.
88. An exporter can share exchange rate risk with their customers by

A. invoicing in their customer's local currency.

B. splitting the difference, and invoicing half of sales in local currency and half of sales in home
currency.
C. invoicing sales in a currency basket such as the SDR as the invoice currency.
D. both b and c

89. An exporter faced with exposure to a depreciating currency can reduce transaction exposure with
a strategy of

A. paying or collecting early.

B. paying or collecting late.
C. paying late, collecting early.
D. paying early, collecting late.

90. An exporter faced with exposure to an appreciating currency can reduce transaction exposure
with a strategy of

A. paying or collecting early.

B. paying or collecting late.
C. paying late, collecting early.
D. paying early, collecting late.

91. A MNC seeking to reduce transaction exposure with a strategy of leading and lagging

A. can probably employ the strategy more effectively with intra firm payables and receivables
than with customers or outside suppliers.
B. can employ the strategy most easily with customers, regardless of market structure.
C. can employ the strategy most easily with suppliers, regardless of market structure.
D. none of the above
92. Find the net exposure of the MNC with the following intra affiliate transactions shown.

A. $55
B. $65
C. $800
D. none of the above

93. In evaluating the pros and cons of corporate risk management, one argument against hedging is

A. if the corporate guys were good at forecasting exchange rates, they would make more money
on Wall Street, so only incompetent managers are left at corporations to hedge.
B. shareholders who are diversified have already managed their exchange rate risk.
C. the hedging costs go into someone else's pocket.
D. none of the above

94. If a firm faces progressive tax rates,

A. they should spread income out across time and subsidiaries.

B. they should focus on maximizing income in one division or subsidiary.
C. they should manage their income recognition without regard to their taxes.
D. none of the above

95. In evaluating the pros and cons of corporate risk management, "market imperfections" refer to

A. information asymmetry, differential transaction costs, default costs, and progressive corporate
taxes.
B. leading and lagging, receivables and payables, and diversification costs.
C. economic costs, noneconomic costs, arbitrage costs, and hedging costs.
D. management costs, corporate costs, liquidity costs, and trading costs.
96. ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10
million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or
depreciating. Calculate the expected tax of ABC if it is operating in a foreign country that has
progressive corporate taxes as shown below:
Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.

A. $3,375,000
B. $6,000,000
C. $1,500,000
D. $4,500,000

97. ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10
million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or
depreciating. Step one: calculate the expected tax of ABC if it is operating in a foreign country
that has progressive corporate taxes as shown below:
Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.
Step two: ABC is considering implementing a hedging program that will eliminate their exchange
rate risk: they will make a certain $15 million whether or not the dollar appreciates or depreciates.
How much will they save in taxes if they implement the program?

A. $0
B. $3,375,000
C. $1,500,000
D. $4,500,000

98. A study of Fortune 500 firms hedging practices shows that

A. over 90 percent of Fortune 500 firms use forward contracts.

B. over 90 percent of Fortune 500 firms use options contracts.
C. both a and b
D. none of the above
99. Simplify the following set of intra company cash flows for this Swiss Firm.
Consider the following exchange rates.
100.Simplify the following set of intra company cash flows for this Swiss Firm.
Consider the following exchange rates.
 Chapter 08 Management of Transaction Exposure Key

1. Transaction exposure is defined as

A. the sensitivity of realized domestic currency values of the firm's contractual cash flows
denominated in foreign currencies to unexpected exchange rate changes.
B. the extent to which the value of the firm would be affected by unanticipated changes in
exchange rate.
C. the potential that the firm's consolidated financial statement can be affected by changes in
exchange rates.
D. ex post and ex ante currency exposures.
Eun - Chapter 08 #1
Topic: Three Types of Exposure

2. The most direct and popular way of hedging transaction exposure is by

A. exchange-traded futures options.

B. currency forward contracts.
C. foreign currency warrants.
D. borrowing and lending in the domestic and foreign money markets.
Eun - Chapter 08 #2
Topic: Three Types of Exposure

3. If you have a long position in a foreign currency, you can hedge with:

A. A short position in an exchange-traded futures option

B. A short position in a currency forward contract
C. A short position in foreign currency warrants
D. Borrowing (not lending) in the domestic and foreign money markets
Eun - Chapter 08 #3
Topic: Three Types of Exposure

4. If you owe a foreign currency denominated debt, you can hedge with

A. a long position in a currency forward contract.

B. a long position in an exchange-traded futures option.
C. buying the foreign currency today and investing it in the foreign county.
D. both a and c
Eun - Chapter 08 #4
Topic: Three Types of Exposure
5. If you own a foreign currency denominated bond, you can hedge with

A. a long position in a currency forward contract.

B. a long position in an exchange-traded futures option.
C. buying the foreign currency today and investing it in the foreign county.
D. a swap contract where pay the cash flows of the bond in exchange for dollars.
Eun - Chapter 08 #5
Topic: Three Types of Exposure

6. The sensitivity of "realized" domestic currency values of the firm's contractual cash flows
denominated in foreign currency to unexpected changes in the exchange rate is

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above
Eun - Chapter 08 #6
Topic: Three Types of Exposure

7. The sensitivity of the firm's consolidated financial statements to unexpected changes in the
exchange rate is

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above
Eun - Chapter 08 #7
Topic: Three Types of Exposure

8. The extent to which the value of the firm would be affected by unexpected changes in the
exchange rate is

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above
Eun - Chapter 08 #8
Topic: Three Types of Exposure
9. With any hedge

A. your losses on one side should about equal your gains on the other side.
B. you should try to make money on both sides of the transaction: that way you make money
coming and going.
C. you should spend at least as much time working the hedge as working the underlying deal
itself.
D. you should agree to anything your banker puts in front of your face.
Eun - Chapter 08 #9
Topic: Three Types of Exposure

10. With any successful hedge

A. you are guaranteed to lose money on one side.

B. you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
C. both a and b
D. none of the above
Eun - Chapter 08 #10
Topic: Three Types of Exposure

11. The choice between a forward market hedge and a money market hedge often comes down
to

A. interest rate parity.

B. option pricing.
C. flexibility and availability.
D. none of the above
Eun - Chapter 08 #11
Topic: Three Types of Exposure

12. Since a corporation can hedge exchange rate exposure at low cost

A. there is no benefit to the shareholders in an efficient market.

B. shareholders would benefit from the risk reduction that hedging offers.
C. the corporation's banker would benefit from the risk reduction that hedging offers.
D. none of the above
Eun - Chapter 08 #12
Topic: Three Types of Exposure
13. A CFO should be least worried about

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above
Eun - Chapter 08 #13
Topic: Three Types of Exposure

14. Exchange rate risk of a foreign currency payable is an example of

A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above
Eun - Chapter 08 #14
Topic: Three Types of Exposure

15. A stock market investor would pay attention to

A. anticipated changes in exchange rates that have been already discounted and reflected in
the firm's value.
B. unanticipated changes in exchange rates that have not been discounted and reflected in
the firm's value.
Eun - Chapter 08 #15
Topic: Three Types of Exposure
16. Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million
payable in one year. The money market interest rates and foreign exchange rates are given as
follows:

Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in
exchange for a predetermined amount of U.S. dollar. Which of the following is (or are) true?
On the maturity date of the contract Boeing will:

(i) have to deliver €10 million to the bank (the counterparty of the forward contract)
(ii) take delivery of $14.6 million
(iii) have a zero net pound exposure
(iv) have a profit, or a loss, depending on the future changes in the exchange rate, from this
British sale

A. (i) and (iv)

B. (ii) and (iv)
C. (ii), (iii), and (iv)
D. (i), (ii), and (iii)
Eun - Chapter 08 #16
Topic: Forward Market Hedge
17. Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million
payable in one year. The money market interest rates and foreign exchange rates are given as
follows:

Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in
exchange for a predetermined amount of U.S. dollars. Suppose that on the maturity date of
the forward contract, the spot rate turns out to be $1.40/€ (i.e. less than the forward rate of
$1.46/€). Which of the following is true?

A. Boeing would have received only $14.0 million, rather than €14.6 million, had it not entered
into the forward contract
B. Boeing gained $0.6 million from forward hedging
C. a and b
D. none of the above
Eun - Chapter 08 #17
Topic: Forward Market Hedge
18. Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an Italian firm
for €1,000,000 worth of bicycles. Payment from the Italian firm (in €) is due in twelve months.
Your firm wants to hedge the receivable into pounds. Not dollars. Use the following table for
exchange rate data.

Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an
estimate of how many contracts of what type.

A. Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable.
Convert €970,873.79 to dollars at spot, receive $1.165.048,54. Convert dollars to pounds at
spot, receive £728.155.34.
B. Sell €1m forward using 16 contracts at $1.20 per €1. Buy £750,000 forward using 12
contracts at $1.60 per £1.
C. Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.
D. Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1. Buy £750,000
forward using 12 contracts at the forward rate of $1.72 per £1.
Eun - Chapter 08 #18
Topic: Forward Market Hedge
19. A Japanese EXPORTER has a €1,000,000 receivable due in one year. Spot and forward
exchange rate data is given in the table:

The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using
forward contracts that will hedge exchange rate risk.

A. Borrow €970,873.79 today; in one year you owe €1m, which will be financed with the
receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars
to yen at spot, receive ¥116,504,854.
B. Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1. Buy ¥150,000,000
forward using 11.52 contracts, at the forward rate of $1.00 = ¥120.
C. Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1. Buy ¥150,000,000
forward using 12 contracts, at the forward rate of $1.00 = ¥120.
D. None of the above
Eun - Chapter 08 #19
Topic: Forward Market Hedge

20. Your firm has a British customer that is willing to place a $1 million order, but wants to pay in
pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year forward
rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year.
What is the fairest exchange rate to use?

A. $1.85 = £1.00
B. $1.8750 = £1.00
C. $1.90 = £1.00
D. none of the above
Eun - Chapter 08 #20
Topic: Forward Market Hedge

21. Your firm has a British customer that is willing to place a $1 million order (with payment due in
6 months), but insists upon paying in pounds instead of dollars.

A. The customer essentially wants you to discount your price by the value of a put option on
pounds.
B. The customer essentially wants you to discount your price by the value of a call option on
pounds.
C. None of the above
Eun - Chapter 08 #21
Topic: Forward Market Hedge
22. Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an American
firm for $1,000,000 worth of bicycles. Payment from the American firm (in U.S. dollars) is due
in six months. Detail a strategy using futures contracts that will hedge your exchange rate risk.

A. Go short 12 six-month forward contracts; pay £555,600.

B. Go short 16 six-month forward contracts. Pay approximately £537,600.
C. Go long 12 six-month forward contracts. Receive approximately £549,500.
D. Go long 16 six-month forward contracts; raise approximately £537,600.
Eun - Chapter 08 #22
Topic: Forward Market Hedge

23. Your firm is a U.S.-based exporter of bicycles. You have sold an order to a French firm for
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in three months.
Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an
estimate of how many contracts of what type and how much (in $) your firm will have.

A. Go short 12 six-month forward contracts; pay $1,290,000.

B. Go short 16 six-month forward contracts. Pay $1,230,000.
C. Go long 16 six-month forward contracts; raise $1,230,000.
D. Go long 12 six-month forward contracts. Receive $1,230,000.
Eun - Chapter 08 #23
Topic: Forward Market Hedge
24. Your firm is a U.K.-based exporter of bicycles. You have sold an order to a French firm for
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in 12 months.
Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an
estimate of how many contracts of what type and maturity.

A. Go short 100 12-month euro futures contracts; and short 80 12-month pound futures
contracts.
B. Go long 100 12-month euro futures contracts; and long 80 12-month pound futures
contracts.
C. Go long 100 12-month euro futures contracts; and short 80 12-month pound futures
contracts.
D. Go short 100 12-month euro futures contracts; and long 80 12-month pound futures
contracts.
E. None of the above
Eun - Chapter 08 #24
Topic: Forward Market Hedge
25. Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm
for €1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Detail a strategy
using futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go short 100 12-month euro futures contracts; and short 80 12-month pound futures
contracts.
B. Go long 100 12-month euro futures contracts; and long 80 12-month pound futures
contracts.
C. Go long 100 12-month euro futures contracts; and short 80 12-month pound futures
contracts.
D. Go short 100 12-month euro futures contracts; and long 80 12-month pound futures
contracts.
E. None of the above
Eun - Chapter 08 #25
Topic: Forward Market Hedge
26. Your firm is a Swiss exporter of bicycles. You have sold an order to a French firm for
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in 12 months.
Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an
estimate of how many contracts of what type and maturity.

A. Go short 100 12-month euro futures contracts; and short 160 12-month SFr. futures
contracts.
B. Go long 100 12-month € futures contracts; and long 160 12-month SFr. futures contracts.
C. Go long 100 12-month euro futures contracts; and short 160 12-month Swiss Franc futures
contracts.
D. Go short 100 12-month euro futures contracts; and long 160 12-month Swiss Franc futures
contracts.
E. None of the above
Eun - Chapter 08 #26
Topic: Forward Market Hedge
27. Your firm is a Swiss importer of bicycles. You have placed an order with an Italian firm for
€1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Detail a strategy using
futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go short 100 12-month euro futures contracts; and short 160 12-month SFr. futures
contracts.
B. Go long 100 12-month € futures contracts; and long 160 12-month SFr. futures contracts.
C. Go long 100 12-month euro futures contracts; and short 160 12-month Swiss Franc futures
contracts.
D. Go short 100 12-month euro futures contracts; and long 160 12-month Swiss Franc futures
contracts.
E. None of the above
Eun - Chapter 08 #27
Topic: Forward Market Hedge
28. Your firm is an Italian exporter of bicycles. You have sold an order to a British firm for
£1,000,000 worth of bicycles. Payment from the customer (in pounds sterling) is due in 12
months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have
an estimate of how many contracts of what type and maturity.

A. Go long 100 12-month pound futures contracts; and long 125 12-month euro futures
contracts.
B. Go short 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts.
C. Go long 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts.
D. Go short 100 12-month pound futures contracts; and long 125 12-month euro futures
contracts.
E. None of the above
Eun - Chapter 08 #28
Topic: Forward Market Hedge
29. Your firm is an Italian importer of bicycles. You have placed an order with a British firm for
£1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Detail a
strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of
how many contracts of what type and maturity.

A. Go long 100 12-month pound futures contracts; and long 125 12-month euro futures
contracts.
B. Go short 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts.
C. Go long 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts.
D. Go short 100 12-month pound futures contracts; and long 125 12-month euro futures
contracts.
E. None of the above
Eun - Chapter 08 #29
Topic: Forward Market Hedge
30. Your firm is a U.K.-based exporter of bicycles. You have sold an order to a Swiss firm for SFr.
1,000,000 worth of bicycles. Payment from the Swiss firm (in Swiss francs) is due in 12
months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have
an estimate of how many contracts of what type and maturity.

A. Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures
contracts.
B. Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures
contracts.
C. Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures
contracts.
D. Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures
contracts.
E. None of the above
Eun - Chapter 08 #30
Topic: Forward Market Hedge
31. Your firm is a U.K.-based importer of bicycles. You have placed an order with a Swiss firm for
SFr. 1,000,000 worth of bicycles. Payment (in Swiss francs) is due in 12 months. Detail a
strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of
how many contracts of what type and maturity.

A. Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures
contracts.
B. Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures
contracts.
C. Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures
contracts.
D. Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures
contracts.
E. None of the above
Eun - Chapter 08 #31
Topic: Forward Market Hedge
32. Your firm is a Swiss exporter of bicycles. You have sold an order to a British firm for
£1,000,000 worth of bicycles. Payment from the British firm (in pounds sterling) is due in 12
months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have
an estimate of how many contracts of what type and maturity.

A. Go short 100 12-month pound futures contracts; and long 200 12-month SFr. futures
contracts.
B. Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures
contracts.
C. Go short 100 12-month pound futures contracts; and short 200 12-month SFr. futures
contracts.
D. Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures
contracts.
E. None of the above
Eun - Chapter 08 #32
Topic: Forward Market Hedge
33. Your firm is a Swiss importer of bicycles. You have placed an order with a British firm for
£1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Detail a
strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of
how many contracts of what type and maturity.

A. Go short 100 12-month pound futures contracts; and long 200 12-month SFr. futures
contracts.
B. Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures
contracts.
C. Go short 100 12-month pound futures contracts.
D. Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures
contracts.
E. None of the above
Eun - Chapter 08 #33
Topic: Forward Market Hedge
34. Your firm is an Italian exporter of bicycles. You have sold an order to a Swiss firm for SFr.
2,000,000 worth of bicycles. Payment from the customer (in Swiss francs) is due in 12 months.
Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an
estimate of how many contracts of what type and maturity.

A. Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures
contracts.
B. Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures
contracts.
C. Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures
contracts.
D. Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures
contracts.
E. None of the above
Eun - Chapter 08 #34
Topic: Forward Market Hedge
35. Your firm is an Italian importer of bicycles. You have placed an order with a Swiss firm for SFr.
2,000,000 worth of bicycles. Payment (in francs) is due in 12 months. Detail a strategy using
futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

A. Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures
contracts.
B. Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures
contracts.
C. Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures
contracts.
D. Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures
contracts.
E. None of the above
Eun - Chapter 08 #35
Topic: Forward Market Hedge
36. Your firm is a U.K.-based exporter of bicycles. You have sold an order to a French firm for
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in 12 months. Use
a money market hedge to redenominate this one-year receivable into a pound-denominated
receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. £803,721.49
B. €800,000
C. £780,312.13
D. £72,352.94
Eun - Chapter 08 #36
Topic: Money Market Hedge

37. Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm
for €1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Use a money market
hedge to redenominate this one-year receivable into a pound-denominated receivable with a
one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. £803,721.49
B. €800,000
C. £780,312.13
D. £72,352.94
Eun - Chapter 08 #37
Topic: Money Market Hedge
38. Your firm is a Swiss exporter of bicycles. You have sold an order to a French firm for
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in 12 months. Use
a money market hedge to redenominate this one-year receivable into a Swiss franc-
denominated receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. SFr. 1,728,900.26
B. SFr. 1,600,000
C. SFr. 1,544,705.88
D. SFr. 800,000
Eun - Chapter 08 #38
Topic: Money Market Hedge

39. Your firm is a Swiss importer of bicycles. You have placed an order with an Italian firm for
€1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Use a money market
hedge to redenominate this one-year receivable into a Swiss franc-denominated receivable
with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. SFr. 1,728,900.26
B. SFr. 1,600,000
C. SFr. 1,544,705.88
D. SFr. 800,000
Eun - Chapter 08 #39
Topic: Money Market Hedge
40. Your firm is an Italian exporter of bicycles. You have sold an order to a British firm for
£1,000,000 worth of bicycles. Payment from the customer (in pounds sterling) is due in 12
months. Use a money market hedge to redenominate this one-year receivable into a euro-
denominated receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. €1,225,490.20
B. €1,244,212.10
C. €1,250,000
D. €1,219,815.78
Eun - Chapter 08 #40
Topic: Money Market Hedge

41. Your firm is an Italian importer of British bicycles. You have placed an order with a British firm
for £1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Use a
money market hedge to redenominate this one-year receivable into a euro-denominated
receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. €1,225,490.20
B. €1,244,212.10
C. €1,250,000
D. €1,219,815.78
Eun - Chapter 08 #41
Topic: Money Market Hedge
42. Your firm is a U.K.-based exporter of bicycles. You have sold an order to a Swiss firm for SFr.
1,000,000 worth of bicycles. Payment from the Swiss firm (in Swiss francs) is due in 12
months. Use a money market hedge to redenominate this one-year receivable into a euro-
denominated receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. £500,000
B. £464,874.41
C. £446,730.77
D. £509,900.99
Eun - Chapter 08 #42
Topic: Money Market Hedge

43. Your firm is a U.K.-based importer of bicycles. You have placed an order with a Swiss firm for
SFr. 1,000,000 worth of bicycles. Payment (in Swiss francs) is due in 12 months. Use a money
market hedge to redenominate this one-year receivable into a euro-denominated receivable
with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. £500,000
B. £464,874.41
C. £446,730.77
D. £509,900.99
Eun - Chapter 08 #43
Topic: Money Market Hedge
44. Your firm is a Swiss exporter of bicycles. You have sold an order to a British firm for
£1,000,000 worth of bicycles. Payment from the British firm (in pounds sterling) is due in 12
months. Use a money market hedge to redenominate this one-year receivable into a euro-
denominated receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. SFr. 2,000,000
B. SFr. 2,151,118.62
C. SFr. 2,068,383.28
D. SFr. 1,921,941.75
Eun - Chapter 08 #44
Topic: Money Market Hedge

45. Your firm is a Swiss importer of bicycles. You have placed an order with a British firm for
£1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Use a money
market hedge to redenominate this one-year pound denominated payable into a Swiss franc-
denominated payable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. SFr. 2,000,000
B. SFr. 2,151,118.62
C. SFr. 2,068,383.28
D. SFr. 1,921,941.75
Eun - Chapter 08 #45
Topic: Money Market Hedge
46. Your firm is an Italian exporter of bicycles. You have sold an order to a Swiss firm for SFr.
2,000,000 worth of bicycles. Payment from the customer (in Swiss francs) is due in 12 months.
Use a money market hedge to redenominate this one-year franc denominated receivable into
a euro-denominated receivable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. €1,116,826.92
B. €1,250,000
C. €1,134,122.29
D. €1,156,804.73
Eun - Chapter 08 #46
Topic: Money Market Hedge

47. Your firm is an Italian importer of bicycles. You have placed an order with a Swiss firm for SFr.
2,000,000 worth of bicycles. Payment (in francs) is due in 12 months. Use a money market
hedge to redenominate this one-year franc denominated payable into a euro-denominated
payable with a one-year maturity.

The following were computed without rounding. Select the answer closest to yours.

A. €1,116,826.92
B. €1,250,000
C. €1,134,122.29
D. €1,156,804.73
Eun - Chapter 08 #47
Topic: Money Market Hedge
48. From the perspective of a corporate CFO, when hedging a payable versus a receivable

A. credit risk considerations are more germane for a payable.

B. credit risk considerations are more germane for a receivable.
C. none of the above
Eun - Chapter 08 #48
Topic: Money Market Hedge

49. Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an Italian firm
for €1,000,000 worth of bicycles. Payment from the Italian firm (in €) is due in twelve months.
Your firm wants to hedge the receivable into pounds. Not dollars. Interest rates are 3% in €,
2% in $ and 4% in £.

Detail a strategy using spot exchange rates and borrowing or lending that will hedge your
exchange rate risk.

A. Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable.
Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to pounds at
spot, receive £728,155.34.
B. Sell €1m forward using 16 contracts at $1.20 per €1. Buy £750,000 forward using 12
contracts at $1.60 per £1.
C. Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1. Buy £750,000
forward using 12 contracts at the forward rate of $1.72 per £1.
D. None of the above
Eun - Chapter 08 #49
Topic: Money Market Hedge
50. A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail a strategy using
a money market hedge that will eliminate any exchange rate risk.

A. Borrow €970,873.79 today. Convert the euro to dollars at the spot exchange rate, receive
$1,165,048.54. Convert these dollars to yen at the spot rate, receive ¥.
B. Borrow €943,396.22 today. Convert the euro to dollars at the spot exchange rate, convert
these dollars to yen at the spot rate, receive ¥117,924,528.30.
C. Lend €943,396.22 today. Convert the euro to dollars at the spot exchange rate, convert
these dollars to yen at the spot rate.
D. Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate;
lend €943,396.22 at 5.25%.
Eun - Chapter 08 #50
Topic: Money Market Hedge

51. A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the U.S. firm gets
paid. To hedge, the U.S. firm bought put options on the euro with a strike price of $1.65. They
paid an option premium $0.01 per euro. If at maturity, the exchange rate is $1.60,

A. the firm will realize $1,145,000 on the sale net of the cost of hedging.
B. the firm will realize $1,150,000 on the sale net of the cost of hedging.
C. the firm will realize $1,140,000 on the sale net of the cost of hedging.
D. none of the above
Eun - Chapter 08 #51
Topic: Options Market Hedge
52. Buying a currency option provides

A. a flexible hedge against exchange exposure.

B. limits the downside risk while preserving the upside potential.
C. a right, but not an obligation, to buy or sell a currency.
D. all of the above
Eun - Chapter 08 #52
Topic: Options Market Hedge

53. Which of the following options strategies are internally consistent?

A. Sell puts and buy calls

B. Buy puts and sell calls
C. Buy puts and buy calls
D. Both a and b
Eun - Chapter 08 #53
Topic: Options Market Hedge

54. A Japanese EXPORTER has a €1,000,000 receivable due in one year.

Detail a strategy using options that will eliminate exchange rate risk.

A. Buy 16 put options on euro, sell 10 call options on yen.

B. Buy 16 put options on euro, buy 10 call options on yen.
C. Sell 16 call options on euro, buy 10 put options on yen.
D. None of the above
Eun - Chapter 08 #54
Topic: Options Market Hedge
55. A Japanese EXPORTER has a €1,000,000 receivable due in one year.
Estimate the cost today of an options strategy that will eliminate exchange rate risk.

A. $20,000
B. $5,000
C. $12,500
D. None of the above
Eun - Chapter 08 #55
Topic: Options Market Hedge

56. A Japanese IMPORTER has a $1,250,000 PAYABLE due in one year.

Detail a strategy using forward contracts that will hedge his exchange rate risk.

A. Go short in 12 yen forward contracts.

B. Go long in 12 yen forward contracts.
C. Go short in 16 yen forward contracts.
D. None of the above
Eun - Chapter 08 #56
Topic: Forward Contracts
Topic: Hedging Foreign Currency Payables
57. A Japanese IMPORTER has a €1,000,000 PAYABLE due in one year.

The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using
forward contracts that will hedge his exchange rate risk. Have an estimate of how many
contracts of what type.

A. Go short in 12 yen forward contracts. Go long in 16 euro contracts.

B. Go long in 12 yen forward contracts. Go short in 16 euro contracts.
C. Go short in 16 yen forward contracts. Go long in 12 euro contracts.
D. None of the above
Eun - Chapter 08 #57
Topic: Forward Contracts
Topic: Hedging Foreign Currency Payables

58. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750
million payable in one year to a bank in Tokyo. Which of the following is NOT part of a money
market hedge?

A. Buy the ¥750 million at the forward exchange rate.

B. Find the present value of ¥750 million at the Japanese interest rate.
C. Buy that much yen at the spot exchange rate.
D. Invest in risk-free Japanese securities with the same maturity as the accounts payable
obligation.
Eun - Chapter 08 #58
Topic: Money Market Instruments

59. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750
million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the
one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6
percent in the United States. XYZ can also buy a one-year call option on yen at the strike price
of $0.0086 per yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this
obligation using the money market hedge is

A. $6,450,000.
B. $6,545,400.
C. $6,653,833.
D. $6,880,734.
Eun - Chapter 08 #59
 Topic: Money Market Instruments

60. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750
million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the
one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6
percent in the United States. XYZ can also buy a one-year call option on yen at the strike price
of $0.0086 per yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this
obligation using the forward hedge is

A. $6,450,000.
B. $6,545,400.
C. $6,653,833.
D. $6,880,734.
Eun - Chapter 08 #60
Topic: Money Market Instruments

61. To hedge a foreign currency payable,

A. buy call options on the foreign currency.

B. buy put options on the foreign currency.
C. sell call options on the foreign currency.
D. sell put options on the foreign currency.
Eun - Chapter 08 #61
Topic: Currency Options Contracts

62. To hedge a foreign currency receivable,

A. buy call options on the foreign currency with a strike in the domestic currency.
B. buy put options on the foreign currency with a strike in the domestic currency.
C. sell call options on the foreign currency with a strike in the domestic currency.
D. sell put options on the foreign currency with a strike in the domestic currency.
Eun - Chapter 08 #62
Topic: Currency Options Contracts

63. A call option on £1,000 with a strike price of €1,250 is equivalent to

A. a put option on €1,250 with an exercise price of €1,000.

B. a portfolio of options: a put on €1,250 with a strike price in dollars plus a call on £1,000 with
a strike price in dollars.
C. a put option on £1,000 with an exercise price of €1,250.
D. both a and b
Eun - Chapter 08 #63
Topic: Currency Options Contracts
64. A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to

A. a put option to sell $18,000 at a strike price of $1.80 = £1.00.

B. a call option on $18,000 at a strike price of $1.80 = £1.00.
C. a put option on £10,000 at a strike price of $1.80 = £1.00.
D. none of the above
Eun - Chapter 08 #64
Topic: Currency Options Contracts

65. A put option to sell $18,000 at a strike price of $1.80 = £1.00 is equivalent to

A. a call option to buy £10,000 at a strike price of $1.80 = £1.00.

B. a call option on $18,000 at a strike price of $1.80 = £1.00.
C. a put option on £10,000 at a strike price of $1.80 = £1.00.
D. none of the above
Eun - Chapter 08 #65
Topic: Currency Options Contracts

66. XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750
million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the
one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6
percent in the United States. XYZ can also buy a one-year call option on yen at the strike price
of $0.0086 per yen for a premium of 0.012 cent per yen. Assume that the forward rate is the
best predictor of the future spot rate. The future dollar cost of meeting this obligation using the
option hedge is

A. $6,450,000.
B. $6,545,400.
C. $6,653,833.
D. $6,880,734.
Eun - Chapter 08 #66
Topic: Currency Options Contracts

67. Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will
hedge your liability?

A. Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K. at i£.
B. Buy a call option on £100,000 with a strike price in dollars.
C. Take a long position in a forward contract on £100,000 with a 3-month maturity.
D. All of the above
Eun - Chapter 08 #67
Topic: Currency Options Contracts
68. Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will
hedge your liability?

A. Buy a call option on £100,000 with a strike price in euro.

B. Buy a put option on £100,000 with a strike price in dollars.
C. Buy a call option on £100,000 with a strike price in dollars.
D. None of the above
Eun - Chapter 08 #68
Topic: Currency Options Contracts

69. Suppose that the exchange rate is €1.25 = £1.00.

Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00.
Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike
prices of €1.25 = £1.00.
For a U.K. firm to hedge a €100,000 payable,

A. buy 10 call options on the euro with a strike in pounds sterling.

B. buy 8 put options on the pound with a strike in euro.
C. sell 10 call options on the euro with a strike in pounds sterling.
D. sell 8 put options on the pound with a strike in euro.
E. both a and b
F. both c and d
Eun - Chapter 08 #69
Topic: Currency Options Contracts

70. Suppose that the exchange rate is €1.25 = £1.00.

Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00. Options (calls and puts) are available on the Frankfurt exchange in
units of £10,000 with strike prices of €1.25 = £1.00. For a U.K. firm to hedge a €100,000
receivable,

A. buy 10 call options on the euro with a strike in pounds sterling.

B. buy 8 put options on the pound with a strike in euro.
C. buy 10 put options on the euro with a strike in pounds sterling.
D. buy 8 call options on the pound with a strike in euro.
E. both a and b
F. both c and d
Eun - Chapter 08 #70
Topic: Currency Options Contracts
71. Suppose that the exchange rate is €1.25 = £1.00.
Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with
strike prices of $1.60/€1.00.
Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with
strike prices of $2.00/£1.00.
For a U.S. firm to hedge a €100,000 payable,

A. buy 10 call options on the euro with a strike in dollars.

B. buy 8 put options on the pound with a strike in dollars.
C. sell 10 call options on the euro with a strike in dollars.
D. sell 8 put options on the pound with a strike in dollars.
E. both a and b
F. both c and d
Eun - Chapter 08 #71
Topic: Currency Options Contracts

72. Suppose that the exchange rate is €1.25 = £1.00.

Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with
strike prices of $1.60/€1.00.
Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with
strike prices of $2.00/£1.00.
For a U.S. firm to hedge a €100,000 receivable,

A. buy 10 call options on the euro with a strike in dollars.

B. buy 10 put options on the pound with a strike in dollars.
C. sell 10 call options on the euro with a strike in dollars.
D. sell 8 put options on the pound with a strike in dollars.
E. both a and b
F. both c and d
Eun - Chapter 08 #72
Topic: Currency Options Contracts

73. Suppose that $2 = £1, $1.60 = €1, and the cross exchange rate is €1.25 = £1.00. If you own a
call option on £10,000 with a strike price of $1.50, you would exercise this option at maturity if

A. the $/£ exchange rate is at least $1.60/£.

B. the $/€ exchange rate is at least $1.60/€.
C. the €/£ exchange rate is at least €1.25/£.
D. none of the above
Eun - Chapter 08 #73
Topic: Currency Options Contracts
74. Suppose that the exchange rate is €1.25 = £1.00.
Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00.
Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike
prices of €1.25 = £1.00.
For an Italian firm to hedge a £100,000 payable,

A. buy 10 call options on the pound with a strike in euro.

B. buy 8 put options on the euro with a strike in pounds.
C. both a and b will work.
D. simultaneously use strategies a and b
E. none of the above
Eun - Chapter 08 #74
Topic: Currency Options Contracts

75. Suppose that the exchange rate is €1.25 = £1.00.

Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00. Options (calls and puts) are available on the Frankfurt exchange in
units of £10,000 with strike prices of €1.25 = £1.00. For a French firm to hedge a £100,000
receivable,

A. buy 10 call options on the pound with a strike in euro.

B. buy 8 put options on the pound with a strike in euro.
C. buy 10 put options on the pound with a strike in euro.
D. buy 8 call options on the euro with a strike in pounds.
E. both a and b
F. both c and d
Eun - Chapter 08 #75
Topic: Currency Options Contracts

76. A minor currency is

A. anything other than the "big six": U.S. dollar, British pound, Japanese yen, euro, Canadian
dollar, and Swiss franc.
B. any currency that trades at less than one U.S. dollar.
C. any currency that is less than a $20 denomination.
D. none of the above
Eun - Chapter 08 #76
Topic: Cross-Hedging Minor Currency Exposure
77. A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with

A. forward contracts on the euro.

B. forward contracts on the ruble.
C. forward contracts on the pound.
D. forward contracts on the yen.
Eun - Chapter 08 #77
Topic: Cross-Hedging Minor Currency Exposure

78. When cross-hedging,

A. try to find one asset that has a positive correlation with another asset.
B. the main thing is to find one asset that covaries with another asset in some predictable way.
C. try to find one asset that has a negative correlation with another asset.
D. none of the above
Eun - Chapter 08 #78
Topic: Cross-Hedging Minor Currency Exposure

79. Your firm is bidding on a large construction contract in a foreign country. This contingent
exposure could best be hedged

A. with put options on the foreign currency.

B. with call options on the foreign currency.
C. both a and b, depending upon the specifics ("the rest of the story").
D. with futures contracts.
Eun - Chapter 08 #79
Topic: Hedging Contingent Exposure

80. On a recent sale, Boeing allowed British Airways to pay either $18 million or £10 million.

A. At the due date, British airways will be indifferent between paying dollars or pounds since
they would of course have hedged their exposure either way.
B. Boeing has provided British Airways with a free option to buy $18 million with an exercise
price of £10 million.
C. Boeing has provided British Airways with a free option to sell up to £10 million with an
exercise price of $18 million.
D. All of the above
Eun - Chapter 08 #80
Topic: Hedging Contingent Exposure
81. Contingent exposure can best be hedged with

A. options.
B. money market hedging.
C. futures.
D. all of the above
Eun - Chapter 08 #81
Topic: Hedging Contingent Exposure

82. A 5-year swap contract can be viewed as a portfolio of 5 forward contracts with maturities of 1,
2, 3, 4 and 5 years. One important exception is that

A. the forward price is the same for the swap contract but not for the forward contracts.
B. the swap contract will have daily resettlement.
C. the forward contracts will have resettlement risk.
D. none of the above.
Eun - Chapter 08 #82
Topic: Hedging Recurrent Exposure with Swap Contracts

83. To find the swap rate for a 3-year swap, you would

A. take the arithmetic average of the 1-, 2-, and 3-year forward rates.
B. take the geometric average of the 1-, 2-, and 3-year forward rates.
C. bootstrap the LIBOR yield curve.
D. none of the above
Eun - Chapter 08 #83
Topic: Hedging Recurrent Exposure with Swap Contracts

84. Generally speaking, a firm with recurrent exposure can best hedge using which product?

A. Options
B. Swaps
C. Futures
D. All of the above
Eun - Chapter 08 #84
Topic: Hedging Recurrent Exposure with Swap Contracts
85. The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the
choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500.

A. The seller has given the buyer an at-the-money put option.

B. The seller has given the buyer an at-the-money call option.
C. Both a and b are correct
D. None of the above
Eun - Chapter 08 #85
Topic: Hedging through Invoice Currency

86. The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the
choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500.

A. The seller has given the buyer an at-the-money put option on euro with a strike in pounds.
B. The seller has given the buyer an at-the-money put option on pounds with a strike in euro.
C. The seller has given the buyer an at-the-money call option on euro with a strike in pounds.
D. None of the above
Eun - Chapter 08 #86
Topic: Hedging through Invoice Currency

87. An exporter can shift exchange rate risk to their customers by

A. invoicing in their home currency.

B. invoicing in their customer's local currency.
C. splitting the difference, and invoicing half of sales in local currency and half of sales in
home currency.
D. invoicing sales in a currency basket such as the SDR as the invoice currency.
Eun - Chapter 08 #87
Topic: Hedging through Invoice Currency

88. An exporter can share exchange rate risk with their customers by

A. invoicing in their customer's local currency.

B. splitting the difference, and invoicing half of sales in local currency and half of sales in
home currency.
C. invoicing sales in a currency basket such as the SDR as the invoice currency.
D. both b and c
Eun - Chapter 08 #88
Topic: Hedging through Invoice Currency
89. An exporter faced with exposure to a depreciating currency can reduce transaction exposure
with a strategy of

A. paying or collecting early.

B. paying or collecting late.
C. paying late, collecting early.
D. paying early, collecting late.
Eun - Chapter 08 #89
Topic: Hedging via Lead and Lag

90. An exporter faced with exposure to an appreciating currency can reduce transaction exposure
with a strategy of

A. paying or collecting early.

B. paying or collecting late.
C. paying late, collecting early.
D. paying early, collecting late.
Eun - Chapter 08 #90
Topic: Hedging via Lead and Lag

91. A MNC seeking to reduce transaction exposure with a strategy of leading and lagging

A. can probably employ the strategy more effectively with intra firm payables and receivables
than with customers or outside suppliers.
B. can employ the strategy most easily with customers, regardless of market structure.
C. can employ the strategy most easily with suppliers, regardless of market structure.
D. none of the above
Eun - Chapter 08 #91
Topic: Hedging via Lead and Lag
92. Find the net exposure of the MNC with the following intra affiliate transactions shown.

A. $55
B. $65
C. $800
D. none of the above

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Eun - Chapter 08 #92

Topic: Exposure Netting

93. In evaluating the pros and cons of corporate risk management, one argument against hedging
is

A. if the corporate guys were good at forecasting exchange rates, they would make more
money on Wall Street, so only incompetent managers are left at corporations to hedge.
B. shareholders who are diversified have already managed their exchange rate risk.
C. the hedging costs go into someone else's pocket.
D. none of the above
Eun - Chapter 08 #93
Topic: Exposure Netting
94. If a firm faces progressive tax rates,

A. they should spread income out across time and subsidiaries.

B. they should focus on maximizing income in one division or subsidiary.
C. they should manage their income recognition without regard to their taxes.
D. none of the above
Eun - Chapter 08 #94
Topic: Exposure Netting

95. In evaluating the pros and cons of corporate risk management, "market imperfections" refer to

A. information asymmetry, differential transaction costs, default costs, and progressive

corporate taxes.
B. leading and lagging, receivables and payables, and diversification costs.
C. economic costs, noneconomic costs, arbitrage costs, and hedging costs.
D. management costs, corporate costs, liquidity costs, and trading costs.
Eun - Chapter 08 #95
Topic: Exposure Netting

96. ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10
million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or
depreciating. Calculate the expected tax of ABC if it is operating in a foreign country that has
progressive corporate taxes as shown below:
Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.

A. $3,375,000
B. $6,000,000
C. $1,500,000
D. $4,500,000
Eun - Chapter 08 #96
Topic: Exposure Netting
97. ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10
million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or
depreciating. Step one: calculate the expected tax of ABC if it is operating in a foreign country
that has progressive corporate taxes as shown below:
Corporate income tax rate = 15% for the first $7,500,000.
Corporate income tax rate = 30% for earnings exceeding $7,500,000.
Step two: ABC is considering implementing a hedging program that will eliminate their
exchange rate risk: they will make a certain $15 million whether or not the dollar appreciates
or depreciates. How much will they save in taxes if they implement the program?

A. $0
B. $3,375,000
C. $1,500,000
D. $4,500,000
Eun - Chapter 08 #97
Topic: Exposure Netting

98. A study of Fortune 500 firms hedging practices shows that

A. over 90 percent of Fortune 500 firms use forward contracts.

B. over 90 percent of Fortune 500 firms use options contracts.
C. both a and b
D. none of the above
Eun - Chapter 08 #98
Topic: Exposure Netting
99. Simplify the following set of intra company cash flows for this Swiss Firm.
Consider the following exchange rates.

Step 1: convert all cash flows to a single currency

Step 2:
Use Biltilateral Netting
Step 3:
Use Multilateral Netting

Feedback: Note to Instructors:

Delete the last 3 figures prior to duplicating the exam. Also, please note that there may
exist multiple valid answers to this question. The goal is to minimize the number of
transactions, so 3 cash flows is better than 4.

Eun - Chapter 08 #99

Topic: Exposure Netting
100. Simplify the following set of intra company cash flows for this Swiss Firm.
Consider the following exchange rates.

Step 1: convert all cash flows to a single currency

Step 2:
Use Biltilateral Netting

Step 3:
Use Multilateral Netting

Feedback: Note to Instructors:

Delete the last 3 figures prior to duplicating the exam. Also, please note that there exist at
least 5 perfectly valid answers to this question. The goal is to minimize the number of
transactions, so 3 cash flows is better than 4.

Eun - Chapter 08 #100

Topic: Exposure Netting
Chapter 08 Management of Transaction Exposure Summary

Category # of Questions
Eun - Chapter 08 100
Topic: Cross-Hedging Minor Currency Exposure 3
Topic: Currency Options Contracts 15
Topic: Exposure Netting 9
Topic: Forward Contracts 2
Topic: Forward Market Hedge 20
Topic: Hedging Contingent Exposure 3
Topic: Hedging Foreign Currency Payables 2
Topic: Hedging Recurrent Exposure with Swap Contracts 3
Topic: Hedging through Invoice Currency 4
Topic: Hedging via Lead and Lag 3
Topic: Money Market Hedge 15
Topic: Money Market Instruments 3
Topic: Options Market Hedge 5
Topic: Three Types of Exposure 15