WorksheetsQuiz 7
Total questions: 10
Worksheet time: 8mins
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.
