Exam 11: Managing Transaction Exposure

If interest rate parity exists, the forward hedge will always outperform the money market hedge.

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

Cross-hedging may involve taking a forward position in a currency that is highly correlated with the currency an MNC needs to hedge.

Since the results of both a money market hedge and a forward hedge are known beforehand, an MNC can implement the one that is more feasible.

From the perspective of Detroit Co., which has payables in Mexican pesos and receivables in Canadian dollars, hedging the payables would be most desirable if the expected real cost of hedging payables is ____, and hedging the receivables would be most desirable if the expected real cost of hedging receivables is ____.

Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is $2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period.

Most MNCs can completely hedge all of their transactions.

Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Today's spot rate of the S$ is $.50, and the 180-day forward rate is $.53. A call option on S$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day expiration date. A put option on S$ exists, with an exercise price of $.51, a premium of $.02, and a 180-day expiration date. Jones has developed the following probability distribution for the spot rate in 180 days: Passible spot Fate in 90 D.4. Probrailit \ 48 10\% \5 3 60\% 5 30\% The probability that the forward hedge will result in a higher payment than the options hedge is ____ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).

To hedge a payable position with a currency option hedge, an MNC would write a call option.

Overhedging refers to the hedging of a larger amount in a currency than the actual transaction amount.

A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions.

Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.

You are the treasurer of Montana Corporation and must decide how to hedge (if at all) future payables of 1,000,000 Japanese yen 90 days from now. Call options are available with a premium of $.01 per unit and an exercise price of $.01031 per Japanese yen. The forecasted spot rate of the Japanese yen in 90 days is: Future Spot Rate Probability \ .01035 20\% \ .01032 20\% \ .01030 30\% \ .01029 30\% The 90-day forward rate of the Japanese yen is $.01033. What is the probability that the call option will be exercised (assuming Montana purchased it)?

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:

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

The ____ does not represent an obligation.

Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?

If Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:

Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not) exercised.

An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using options is that a premium must be paid for it.