Quiz about c1100

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:

Accepted Answer

zero.

Answer

positive.

Answer

negative.

Answer

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

Question 2

Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:

Accepted Answer

positive.

Answer

negative.

Answer

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

Answer

zero.

Question 3

Using the information provided, what will be the approximate value of SF600,000 exports in 1 year in U.S. dollars with a forward hedge?

Accepted Answer

$240,000.

Answer

$234,000.

Answer

$238,584.

Answer

$236,127.

Question 4

Using a money market hedge for NZ$600,000 receivables, what is the approximate value in USD?

Accepted Answer

$236,127.

Answer

$238,584.

Answer

$240,000.

Answer

$234,000.

Question 5

An example of cross-hedging is:

Accepted Answer

matching payables in one currency to receivables in a correlated currency.

Answer

using forwards to sell currencies you will receive.

Answer

using forwards to buy currencies you will receive.

Answer

B and C.

Question 6

Which reflects a hedge of net receivables in British pounds?

Accepted Answer

A and B.

Answer

Purchase a currency put option.

Answer

Sell pounds forward.

Answer

Borrow USD, convert to pounds, and invest.

Question 7

Which reflects a hedge of net payables in British pounds?

Accepted Answer

Borrow USD, convert to pounds, and invest.

Answer

Purchase a currency put option.

Answer

Sell pounds forward.

Answer

Sell a currency call option.

Question 8

To lock in the maximum payment for euro payables while benefiting from euro depreciation, the best hedge is:

Accepted Answer

purchasing euro call options.

Answer

money market hedge.

Answer

purchasing euro put options.

Answer

forward purchase of euros.

Question 9

To lock in a minimum rate for yen receivables while benefiting from yen appreciation, the best hedge is:

Accepted Answer

purchasing yen put options.

Answer

money market hedge.

Answer

forward sale of yen.

Answer

purchasing yen call options.

Question 10

The real cost of hedging payables with a forward contract equals:

Accepted Answer

nominal cost of hedging minus nominal cost of not hedging.

Answer

nominal cost of not hedging minus nominal cost of hedging.

Answer

nominal cost of hedging divided by nominal cost of not hedging.

Answer

nominal cost of not hedging divided by nominal cost of hedging.

Question 11

Hedging payables is most desirable if the expected real cost is ____, and hedging receivables is most desirable if the expected real cost is ____.

Accepted Answer

negative; negative

Answer

negative; positive

Answer

zero; positive

Answer

zero; zero

Answer

positive; negative

Question 12

When deciding between a forward and money market hedge, a firm ______ determine which is preferable beforehand and ______ determine if hedging outperforms unhedged.

Accepted Answer

can; cannot

Answer

can; can

Answer

cannot; can

Answer

cannot; cannot

Question 13

If a firm expects the euro to depreciate, the ideal strategy for euro receivables is:

Accepted Answer

sell euros forward.

Answer

purchase euro put options.

Answer

purchase euro call options.

Answer

purchase euros forward.

Answer

remain unhedged.

Question 14

Total USD received after exercising a put option (exercise price = $.61, premium = $.02) on SF1,000,000:

Accepted Answer

$590,000.

Answer

$630,000.

Answer

$610,000.

Answer

$600,000.

Question 15

A ___ involves exchanging currencies with a promise to re-exchange at a future date.

Accepted Answer

parallel loan

Answer

long-term forward contract

Answer

currency option

Answer

money market hedge

Question 16

If interest rate parity exists, a forward hedge will yield the same result as a:

Accepted Answer

money market hedge.

Answer

call option hedge.

Answer

put option hedge.

Answer

require more dollars than a money market hedge.

Question 17

Using a money market hedge for SF200,000 receivables, Parker Company will receive:

Accepted Answer

$96,914.

Answer

$101,904.

Answer

$101,923.

Answer

$98,769.

Question 18

To purchase SF200,000 in 360 days using a money market hedge, the USD needed is:

Accepted Answer

$98,770.

Answer

$101,904.

Answer

$101,923.

Answer

$96,914.

Question 19

Hedging CS600,000 receivables with a forward rate of $.80 results in:

Accepted Answer

receive $480,000 today.

Answer

receive $480,000 in 90 days.

Answer

receive $750,000 today.

Answer

pay $750,000 in 90 days.

Question 20

Probability that a forward hedge on SF800,000 will outperform no hedge:

Accepted Answer

30%.

Answer

10%.

Answer

20%.

Answer

50%.

Question 21

Probability that a forward hedge on SS100,000 payables will cost more than an options hedge:

Accepted Answer

10%.

Answer

0%.

Answer

30%.

Answer

40%.

Question 22

Probability that a forward hedge on NZ$100,000 receivables outperforms options:

Accepted Answer

70%.

Answer

10%.

Answer

30%.

Answer

40%.

Question 23

The ___ hedge is **not** a transaction exposure technique.

Accepted Answer

index

Answer

futures

Answer

forward

Answer

money market

Question 24

Revenue from hedging MYR1,500,000 receivables minus no hedging:

Accepted Answer

$7,500.

Answer

$0.

Answer

-$7,500.

Answer

none of the above

Question 25

Money market hedge for JOD250,000 receivables results in:

Accepted Answer

$370,000.

Answer

$377,115.

Answer

$373,558.

Answer

$363,019.

Question 26

Cost of money market hedge for JOD150,000 payables:

Accepted Answer

$226,269.

Answer

$224,135.

Answer

$224,114.

Answer

$223,212.

Question 27

Lorre Company needs 200,000 Canadian dollars (C$) in 90 days. The probability that hedging will be more costly than not hedging is:

Accepted Answer

40%

Answer

60%

Answer

15%

Answer

85%

Question 28

Quasik Corporation receives 300,000 Canadian dollars (C$) and uses a put option (exercise price = $.73, premium = $.01). Net amount received:

Accepted Answer

$216,000

Answer

$219,000

Answer

$222,000

Answer

$213,000

Question 29

FAB Corporation needs 200,000 Canadian dollars (C$) and uses a call option (exercise price = $.75, premium = $.01). Net amount paid:

Accepted Answer

$144,000

Answer

$148,000

Answer

$152,000

Answer

$150,000

Question 30

Probability of exercising a put option (exercise price = $.50) given forecasted spot rates:

Accepted Answer

50%

Answer

0%

Answer

80%

Answer

None

Question 31

If interest rate parity exists, the money market hedge equals the ______ hedge.

Accepted Answer

forward

Answer

put option

Answer

call option

Answer

none

Question 32

Least effective long-term hedging method:

Accepted Answer

money market hedge

Answer

long-term forward

Answer

currency swap

Answer

parallel loan

Question 33

Effective long-term hedging method:

Accepted Answer

money market hedge

Answer

long-term forward

Answer

currency swap

Answer

parallel loan

Question 34

Methods to reduce transaction exposure include:

Accepted Answer

all

Answer

leading

Answer

lagging

Answer

cross-hedging

Question 35

Hedging individual subsidiaries may be unnecessary if MNC's overall exposure is offset.

Accepted Answer

True

Answer

False

Question 36

To hedge a payable with futures, an MNC would ______ futures.

Accepted Answer

write

Answer

purchase

Answer

sell

Answer

none

Question 37

Forward contracts are typically used for ______ transactions.

Accepted Answer

large

Answer

small

Answer

speculative

Answer

none

Question 38

If forward rate = future spot rate, real cost of hedging payables is:

Accepted Answer

zero

Answer

positive

Answer

negative

Answer

none

Question 39

Measuring real cost of hedging in dollar amounts for comparison:

Accepted Answer

False

Answer

True

Question 40

Forward vs. money market hedge feasibility:

Accepted Answer

True

Answer

False

Question 41

Forward hedge always outperforms money market hedge if IRP holds:

Accepted Answer

False

Answer

True

Question 42

Best hedge for contingent exposure:

Accepted Answer

options

Answer

money market

Answer

futures

Answer

forward

Question 43

Least effective for long-term hedging:

Accepted Answer

futures

Answer

long-term forward

Answer

currency swap

Answer

parallel loan

Question 44

No obligation involved in:

Accepted Answer

currency option

Answer

long-term forward

Answer

currency swap

Answer

parallel loan

Question 45

Hedging individual subsidiaries is necessary even if MNC's exposure is offset:

Accepted Answer

False

Answer

True

Question 46

Risk-averse MNCs may hedge even if unhedged is cheaper:

Accepted Answer

True

Answer

False

Question 47

Money market hedge involves taking a position to cover future payables/receivables:

Accepted Answer

True

Answer

False

Question 48

To hedge payables with options, an MNC writes a call:

Accepted Answer

False

Answer

True

Question 49

MNCs don't need to hedge because shareholders can self-hedge:

Accepted Answer

False

Answer

True

Question 50

Currency futures are standardized for smaller hedges:

Accepted Answer

True

Answer

False

Question 51

To hedge receivables with futures, an MNC buys futures:

Accepted Answer

False

Answer

True

Question 52

Positive real cost of hedging means hedging was favorable:

Accepted Answer

False

Answer

True

Question 53

Futures hedge involves a money market position:

Accepted Answer

False

Answer

True

Question 54

If IRP holds, money market hedge = options hedge:

Accepted Answer

False

Answer

True

Question 55

"Settlement price" refers to a put option's exercise price:

Accepted Answer

False

Answer

True

Question 56

Put option = two swaps of currencies:

Accepted Answer

False

Answer

True

Question 57

Cross-hedging uses correlated currencies for unavailable forwards:

Accepted Answer

True

Answer

False

Question 58

Exact cost of hedging with call options is uncertain:

Accepted Answer

True

Answer

False

Question 59

Higher exercise price call options have lower premiums:

Accepted Answer

False

Answer

True

Question 60

Comparing forward vs. options hedge is straightforward:

Accepted Answer

False

Answer

True

Question 61

Comparing forward vs. money market hedge is straightforward:

Accepted Answer

True

Answer

False

Question 62

If forward rate underestimates future spot, real cost of hedging is:

Accepted Answer

negative

Answer

positive

Answer

zero

Answer

none

Question 63

If forward rate underestimates future spot, real cost of hedging is:

Accepted Answer

negative

Answer

positive

Answer

zero

Answer

none

Question 64

Ideal strategy for euro payables expecting appreciation:

Accepted Answer

buy euros forward

Answer

sell euros forward

Answer

buy euro puts

Answer

buy euro calls

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