Chapter 11—Managing Transaction Exposure

3. Assume the following information:

U.S. deposit rate for 1 year = 11%

U.S. borrowing rate for 1 year = 12%
Swiss deposit rate for 1 year = 8%
Swiss borrowing rate for 1 year = 10%
Swiss forward rate for 1 year = $.40
Swiss franc spot rate = $.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive
SF600,000 in 1 year.

Using the information above, what will be the approximate value of these exports in 1 year in U.S.
dollars given that the firm executes a forward hedge?
a. $234,000.
b. $238,584.
c. $240,000.
d. $236,127.

ANS: C
SOLUTION: SF600,000 ´ $.40 = $240,000

PTS: 1

4. Assume the following information:

U.S. deposit rate for 1 year = 11%

U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = $.40
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 New Zealand dollar spot rate = $.39

Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive
NZ$600,000 in 1 year. You are a consultant for this firm.

Using the information above, what will be the approximate value of these exports in 1 year in U.S.
dollars given that the firm executes a money market hedge?
a. $238,584.
b. $240,000.
c. $234,000.
d. $236,127.

ANS: D
SOLUTION:
1. Borrow NZ$545,455 (NZ$600,000/1.1) = NZ$545,455.

2. Convert NZ$545,455 to $212,727 (at $.39 per NZ$).

3. Invest $212,727 to accumulate $236,127 ($212,727 ´ 1.11) = $236,127.

6. Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
d. A and B

ANS: D PTS: 1

7. Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?
a. purchase a currency put option in British pounds.
b. sell pounds forward.
c. sell a currency call option in British pounds.
d. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
e. A and B

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 ANS: D PTS: 1

14. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will
depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
a. sell euros forward.
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged.

ANS: A PTS: 1

18. Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates:

U.S. Switzerland
360-day borrowing rate 7% 5%
360-day deposit rate 6% 4%

Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. If
Parker Company uses a money market hedge, it will receive ____ in 360 days.
a. $101,904
b. $101,923
c. $98,769
d. $96,914
e. $92,307

© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 ANS: D
SOLUTION:
1. Borrow SF190,476 (SF200,000/1.05) = SF190,476.

2. Convert SF190,476 to $91,428 (SF190,476 ´ $.48) = $91,428.

3. Invest $91,428 at 6% to accumulate $96,914 ($91,428 ´ 1.06) = $96,914.

25. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate
of the NZ$ is $.50, and the 180-day forward rate is $.51. A call option on NZ$ exists, with an exercise
price of $.52, a premium of $.02, and a 180-day expiration date. A put option on NZ$ exists with an
exercise price of $.51, a premium of $.02, and a 180-day expiration date. Patton Co. has developed the
following probability distribution for the spot rate in 180 days:

Possible Spot Rate

in 90 Days Probability
$.48 10%
$.49 60%
$.55 30%

The probability that the forward hedge will result in more U.S. dollars received than the options hedge
is ____ (deduct the amount paid for the premium when estimating the U.S. dollars received on the
options hedge).
a. 10%
b. 30%
c. 40%
d. 70%
e. none of the above

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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 ANS: D
SOLUTION: The put option will be exercised in the first two cases, resulting in an amount
received per unit of $.51  $.02 = $.49. Thus, the forward hedge will result in
more U.S. dollars received ($.51 per unit).

PTS: 1

57. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an
MNC would buy futures.
a. True
b. False

ANS: F PTS: 1

64. The exact cost of hedging with call options (as measured in the text) is not known with certainty at the
time that the options are purchased.
a. True
b. False

ANS: T PTS: 1

67. When comparing the forward hedge to the money market hedge, the MNC can easily determine which
hedge is more desirable, because the cost of each hedge can be determined with certainty.
a. True
b. False

© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 ANS: T PTS: 1

70. Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to
depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:
a. sell euros forward
b. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.
e. remain unhedged

ANS: E PTS: 1

71. Mender Co. will be receiving 500,000 Australian dollars in 180 days. Currently, a 180-day call option
with an exercise price of $.68 and a premium of $.02 is available. Also, a 180-day put option with an
exercise price of $.66 and a premium of $.02 is available. Mender plans to purchase options to hedge
its receivables position. Assuming that the spot rate in 180 days is $.67, what is the amount received
from the currency option hedge (after considering the premium paid)?
a. $330,000
b. $325,000
c. $320,000
d. $340,000

© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 ANS: B PTS: 1

84. Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.
a. True
b. False

ANS: T PTS: 1

87. Lagging refers to the delay of payment by a subsidiary if the currency denominating the payable is
expected to depreciate.
a. True
b. False

ANS: T PTS: 1

© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.