Quiz 7

If a firm is hedging payables with futures contracts, it may end up paying more for the payables than it would have had it remained unhedged if the foreign currency depreciates.

• True

• False

To hedge a receivables position with a currency option hedge, an MNC would buy a put option.

• True

• False

If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will:

• have the same result as a call option hedge on payables.

• have the same result as a put option hedge on payables.

• have the same result as a money market hedge on payables.

• require more dollars than a money market hedge.

• have the same result as a call option hedge on payables AND require more dollars than a money market hedge.

Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90 days from now, then the real cost of hedging payables will be:

• positive.

• negative.

• positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.

• zero.

Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the United States at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the United States?​

• ​$952,381

• ​$995,851

• ​$943,396

• ​$995,025

If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of a U.S. company with a subsidiary in Singapore will be ____ as a result of the exchange rate movement.

• negative

• adversely affected

• favorably affected

• unaffected

____ is (are) not a limitation of hedging translation exposure.

• Inaccurate stock price forecasts

• Inadequate forward contracts for some currencies

• Taxation on gains from forward contracts

• Increased transaction exposure

Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based MNC's reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.

• be reduced; purchasing

• be reduced; selling

• increase; selling

• increase; purchasing

A perfect hedge (full coverage) on translation exposure can usually be achieved when:

• using a money market hedge.

• using a forward hedge.

• using a futures hedge.

• None of these are correct, since a perfect hedge is nearly impossible

An effective way for an MNC to assess its economic exposure is to review the firm's:

• income statement.

• liquidity.

• retained earnings.

• level of stockholders' equity.