F494 Pretest

Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be a positi!e. . b negati!e. . c positi!e if the forward rate e"hibits a premium, and negati!e if the forward rate e"hibits a . discount. d zero. .

____

#. An e"ample of cross-hedging is a find two currencies that are highly positi!ely correlated$ match the payables of the one . currency to the recei!ables of the other currency. b use the forward mar%et to sell forward whate!er currencies you will recei!e. . c use the forward mar%et to buy forward whate!er currencies you will recei!e. . d & and '. .

____

(. )hich of the following reflects a hedge of net recei!ables in &ritish pounds by a *.+. firm, a purchase a currency put option in &ritish pounds. . b sell pounds forward. . c borrow *.+. dollars, con!ert them to pounds, and in!est them in a &ritish pound deposit. . d A and &. .

____

-. *se the following information to calculate the dollar cost of using a money mar%et hedge to hedge #00,000 pounds of payables due in 1.0 days. Assume the firm has no e"cess cash. Assume the spot rate of the pound is /#.0#, the 1.0-day forward rate is /#.00. 0he &ritish interest rate is 12, and the *.+. interest rate is -2 o!er the 1.0-day period. a /(91,#10. . b /(93,190. . c /(..,#10. . d /(.-,431.

. e none of the abo!e. .

____

1. If interest rate parity e"ists and transactions costs are zero, the hedging of payables in euros with a forward hedge will _______. a ha!e the same result as a call option hedge on payables . b ha!e the same result as a put option hedge on payables . c ha!e the same result as a money mar%et hedge on payables . d re5uire more dollars than a money mar%et hedge . e A and 6 .

____

3. 7our company will recei!e '/300,000 in 90 days. 0he 90-day forward rate in the 'anadian dollar is /..0. If you use a forward hedge, you will a recei!e /410,000 today. . b recei!e /410,000 in 90 days. . c pay /410,000 in 90 days. . d recei!e /-.0,000 today. . e recei!e /-.0,000 in 90 days. .

____

4. Assume that +mith 'orporation will need to purchase #00,000 &ritish pounds in 90 days. A call option e"ists on &ritish pounds with an e"ercise price of /1.3., a 90-day e"piration date, and a premium of /.0-. A put option e"ists on &ritish pounds, with an e"ercise price of /1.39, a 90-day e"piration date, and a premium of /.0(. +mith 'orporation plans to purchase options to co!er its future payables. It will e"ercise the option in 90 days 8if at all9. It e"pects the spot rate of the pound to be /1.43 in 90 days. 6etermine the amount of dollars it will pay for the payables, including the amount paid for the option premium. a /(30,000. . b /((.,000. . c /((#,000. . d /((3,000. . e /(--,000. .

____

.. Assume that :ones 'o. will need to purchase 100,000 +ingapore dollars 8+/9 in 1.0 days. 0oday;s spot rate of the +/ is /.10, and the 1.0-day forward rate is /.1(. A call option on +/ e"ists, with an e"ercise price of /.1#, a premium of /.0#, and a 1.0-day e"piration date. A put option on +/ e"ists, with an e"ercise price of /.11, a premium of /.0#, and a 1.0-day e"piration date. :ones has de!eloped the following probability distribution for the spot rate in 1.0 days <ossible +pot =ate in 90 6ays /.-. /.1( /.11

<robability 102 302 (02

0he probability that the forward hedge will result in a higher payment than the options hedge is _______ 8include the amount paid for the premium when estimating the *.+. dollars re5uired for the options hedge9. a 02 . b 102 . c (02 . d -02 . e 402 .

Exhibit 11-1 (30-day borrowing rate (30-day deposit rate *.+. 32 12 :ordan 12 -2

____

9. =efer to >"hibit 11-1. <er%ins 'orp. will recei!e #10,000 :ordanian dinar 8:?69 in (30 days. 0he current spot rate of the dinar is /1.-., while the (30-day forward rate is /1.10. @ow much will <er%ins recei!e in (30 days from implementing a money mar%et hedge 8assume any receipts before the date of the recei!able are in!ested9, a /(44,111. . b /(4(,11.. . c /(3(,019. . d /(40,000. .

____ 10. Aorre 'ompany needs #00,000 'anadian dollars 8'/9 in 90 days and is trying to determine whether or not to hedge this position. Aorre has de!eloped the following probability distribution for the 'anadian dollar

<ossible Balue of 'anadian 6ollar in 90 6ays /0.10.14 0.1. 0.19

<robability 112 #12 (12 #12

0he 90-day forward rate of the 'anadian dollar is /.141, and the e"pected spot rate of the 'anadian dollar in 90 days is /.11. If Aorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging, a -02. . b 302. . c 112. . d .12. .

____ 11. )ith regard to hedging translation e"posure, translation losses _______$ and gains on forward contracts used to hedge translation e"posure _______. a are not ta" deductible$ are ta"ed . b are ta" deductible$ are ta"ed . c are not ta" deductible$ are not ta"ed . d are ta" deductible$ are not ta"ed .

____ 1#. In most cases, translated income gains and losses due to changes in foreign currency !alues are reported as _______ when using CA+&-1#. a current net income . b re!enues 8for gains9 or operating e"penses 8for losses9 . c a component of stoc%holder;s e5uity . d none of the abo!e .

____ 1(. According to the te"t, @onda was able to reduce its economic e"posure by a closing down most of its plants in the *.+. . b producing more automobiles in the *.+. . c relying completely on :apanese supplies for its parts.

. d none of the abo!e. .

____ 1-. In general, it is more difficult to effecti!ely hedge economic or translation e"posure than to hedge transaction e"posure. a true. . b false. .

____ 11. ?nly a small minority of DE's belie!e that the hedging of translation e"posure is a maFor concern, according to a recent sur!ey. a true. . b false. .

____ 13. Guasi% 'orporation will be recei!ing (00,000 'anadian dollars 8'/9 in 90 days. 'urrently, a 90-day call option with an e"ercise price of /.41 and a premium of /.01 is a!ailable. Also, a 90-day put option with an e"ercise price of /.4( and a premium of /.01 is a!ailable. Guasi% plans to purchase options to hedge its recei!able position. Assuming that the spot rate in 90 days is /.41, what is the net amount recei!ed from the currency option hedge, a /#19,000. . b /###,000. . c /#13,000. . d /#1(,000. .

____ 14. If interest rate parity e"ists, and transaction costs do not e"ist, the money mar%et hedge will yield the same result as the ___________ hedge. a put option . b forward . c call option . d none of the abo!e .

____ 1.. )hich of the following is the least effecti!e way of hedging transaction e"posure in the long run, a long-term forward contract.

. b currency swap. . c parallel loan. . d money mar%et hedge. .

____ 19. A money mar%et hedge in!ol!es ta%ing a money mar%et position to co!er a future payables or recei!ables position. a true. . b false. .

____ #0. 0he price at which a currency put option allows the holder to sell a currency is called the settlement price. a true. . b false. .

F494 Pretest Answer Section

MULTIPLE C !ICE 1. 6 #. A (. 6 -. > 1. ' 3. > 4. > .. & 9. 6 10. A 11. A 1#. ' 1(. & 1-. A 11. & 13. ' 14. & 1.. 6 19. A #0. &