FM-13 (Foreign Exchange Risk)

What does the term 'matching' refer to?

• The coupling of two simple financial instruments to create a more complex one

• The mechanism whereby a company balances its foreign currency inflows and outflows

• The adjustment of credit terms between companies

• Contracts not yet offset by futures contracts or fulfilled by delivery

A company whose home currency is the dollar ($) expects to receive 500,000 pesos in six months' time from a customer in a foreign country. The following interest rates and exchange rates are available to the company:
Working to the nearest $100, what is the six-month dollar value of the expected receipt using a money-market hedge?

• $32,500

• $33,700

• $31,800

• $31,900

Edted Co has to pay a Spanish supplier 100,000 euros in three months' time. The company's Finance Director wishes to avoid exchange rate exposure, and is looking at four options.

Indicate, by clicking in the relevant boxes, whether the following would provide cover or not against the exchange rate exposure that Edted would otherwise suffer:

• 1

• 2

• 3

• 4

Indicate, by clicking in the relevant boxes, whether the following statements concerning currency risk are true or false.

Statement
(1) Lagging is a method of hedging transaction exposure
(2) Matching receipts and payments is a method of hedging translation exposure

• (1) True
  (2) False

• (1)False
  (2) False

• (1) True
  (2) True

• (1) False
  (2)True

A UK company has just despatched a shipment of goods to Sweden. The sale will be invoiced in Swedish kroner, and payment is to be made in three months' time. Neither the UK exporter nor the Swedish importer uses the forward foreign exchange market to cover exchange risk.

If the pound sterling were to weaken substantially against the Swedish kroner, what would be the foreign exchange gain or loss effects upon the UK exporter and the Swedish importer? Indicate, by clicking in the relevant boxes, which effect would be seen.

• (1) Gain
  (2) No effect

• (1) No effect
  (2) Gain

A UK company will purchase new machinery in three months' time for $7.5m. The forward exchange rate is $2.0383-$2.0390 = £1.

What is the appropriate three-month forward rate at which the company should hedge this transaction (to four decimal places)?

• $/£ 2.0383

• $/£ 2.0384

• $/£ 2.0483

• $/£ 2.0385

The current spot exchange rate between sterling and the euro is €1.4415 = £1. The sterling annual interest rate is 5.75% pa and the euro annual interest rate is 4.75% pa.

What should the three month €/£ forward rate be (to four decimal places)?

• €/£ 1.4379

• €/£ 1.4370

• €/£ 1.4378

• €/£ 1.4479

Fill in the gap in the sentence below.

The difference between the price of a futures contract and the spot price on a given date is known as........................

Choose from the following:

• the initial margin

• basis

• hedge efficiency

• the premium

Which of the following statements is correct?

• Once purchased, currency futures have a range of close-out dates

• Currency swaps can be used to hedge exchange rate risk over longer periods than the forward market

• Banks will allow forward exchange contracts to lapse if they are not used by a company

• Currency options are paid for when they are exercised

Which of the following statements is true of a put option?

• It is the right to sell an asset at a fixed price

• It is an obligation to sell an asset at a fixed price

• It is the right to buy an asset at a fixed price

• It is an obligation to buy an asset at a fixed price