chapter11managingtransactionexposure.docx
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chapter11managingtransactionexposure.docx
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chapter11managingtransactionexposure
Chapter11ManagingTransactionExposure
1.Assumezerotransactioncosts.Ifthe90-dayforwardrateoftheeuroisanaccurate
estimateofthespotrate90daysfromnow,thentherealcostofhedgingpayableswillbe:
A)positive.
B)negative.
C)positiveiftheforwardrateexhibitsapremium,andnegativeiftheforwardrate
exhibitsadiscount.
D)zero.
ANSWER:
D
2.Assumezerotransactioncosts.Ifthe180-dayforwardrateisanaccurateestimateofthe
spotrate180daysfromnow,thentherealcostofhedgingreceivableswillbe:
A)positive.
B)negative.
C)positiveiftheforwardrateexhibitsapremium,andnegativeiftheforwardrate
exhibitsadiscount.
D)zero.
ANSWER:
D
3.Assumethefollowinginformation:
.depositratefor1year=11%
.borrowingratefor1year=12%
Swissdepositratefor1year=8%
Swissborrowingratefor1year=10%
Swissforwardratefor1year=$.40
Swissfrancspotrate=$.39
Alsoassumethata.exporterdenominatesitsSwissexportsinSwissfrancsand
expectstoreceiveSF600,000in1year.
Usingtheinformationabove,whatwillbetheapproximatevalueoftheseexportsin1
yearin.dollarsgiventhatthefirmexecutesaforwardhedge
A)$234,000.
B)$238,584.
C)$240,000.
D)$236,127.
ANSWER:
C
SOLUTION:
SF600,000×$.40=$240,000
4.Assumethefollowinginformation:
.depositratefor1year=11%
.borrowingratefor1year=12%
NewZealanddepositratefor1year=8%
NewZealandborrowingratefor1year=10%
NewZealanddollarforwardratefor1year=$.40
NewZealanddollarspotrate=$.39
Alsoassumethata.exporterdenominatesitsNewZealandexportsinNZ$and
expectstoreceiveNZ$600,000in1year.Youareaconsultantforthisfirm.
Usingtheinformationabove,whatwillbetheapproximatevalueoftheseexportsin1
yearin.dollarsgiventhatthefirmexecutesamoneymarkethedge
A)$238,584.
B)$240,000.
C)$234,000.
D)$236,127.
ANSWER:
D
SOLUTION:
1.BorrowNZ$545,455(NZ$600,000/=NZ$545,455.
2.ConvertNZ$545,455to$212,727(at$.39perNZ$).
3.Invest$212,727toaccumulate$236,127($212,727×=$236,127.
5.Anexampleofcross-hedgingis:
A)findtwocurrenciesthatarehighlypositivelycorrelated;matchthepayablesofthe
onecurrencytothereceivablesoftheothercurrency.
B)usetheforwardmarkettosellforwardwhatevercurrenciesyouwillreceive.
C)usetheforwardmarkettobuyforwardwhatevercurrenciesyouwillreceive.
D)BandC
ANSWER:
A
6.WhichofthefollowingreflectsahedgeofnetreceivablesinBritishpoundsbya.
firm
A)purchaseacurrencyputoptioninBritishpounds.
B)sellpoundsforward.
C)borrow.dollars,convertthemtopounds,andinvesttheminaBritishpound
deposit.
D)AandB
ANSWER:
D
7.WhichofthefollowingreflectsahedgeofnetpayablesonBritishpoundsbya.firm
A)purchaseacurrencyputoptioninBritishpounds.
B)sellpoundsforward.
C)sellacurrencycalloptioninBritishpounds.
D)borrow.dollars,convertthemtopounds,andinvesttheminaBritishpound
deposit.
E)AandB
ANSWER:
D
8.IfLazerCo.desiredtolockinthemaximumitwouldhavetopayforitsnetpayablesin
eurosbutwantedtobeabletocapitalizeiftheeurodepreciatessubstantiallyagainstthe
dollarbythetimepaymentistobemade,themostappropriatehedgewouldbe:
A)amoneymarkethedge.
B)purchasingeuroputoptions.
C)aforwardpurchaseofeuros.
D)purchasingeurocalloptions.
E)sellingeurocalloptions.
ANSWER:
D
9.IfaSalernoInc.desiredtolockinaminimumrateatwhichitcouldsellitsnet
receivablesinJapaneseyenbutwantedtobeabletocapitalizeiftheyenappreciates
substantiallyagainstthedollarbythetimepaymentarrives,themostappropriatehedge
wouldbe:
A)amoneymarkethedge.
B)aforwardsaleofyen.
C)purchasingyencalloptions.
D)purchasingyenputoptions.
E)sellingyenputoptions.
ANSWER:
D
10.Therealcostofhedgingpayableswithaforwardcontractequals:
A)thenominalcostofhedgingminusthenominalcostofnothedging.
B)thenominalcostofnothedgingminusthenominalcostofhedging.
C)thenominalcostofhedgingdividedbythenominalcostofnothedging.
D)thenominalcostofnothedgingdividedbythenominalcostofhedging.
ANSWER:
A
11.FromtheperspectiveDetroitCo.thathaspayablesinMexicanpesosandreceivablesin
Canadiandollars,hedgingthepayableswouldbemostdesirableiftheexpectedrealcost
ofhedgingpayablesis_______,andhedgingthereceivableswouldbemostdesirableif
theexpectedrealcostofhedgingreceivablesis_______.
A)negative;positive
B)zero;positive
C)zero;zero
D)positive;negative
E)negative;negative
ANSWER:
E
12.Usethefollowinginformationtocalculatethedollarcostofusingamoneymarkethedge
tohedge200,000poundsofpayablesduein180days.Assumethefirmhasnoexcess
cash.Assumethespotrateofthepoundis$,the180-dayforwardrateis$.The
Britishinterestrateis5%,andthe.interestrateis4%overthe180-dayperiod.
A)$391,210.
B)$396,190.
C)$388,210.
D)$384,761.
E)noneoftheabove
ANSWER:
E
SOLUTION:
1.Needtoinvest£190,476(£200,000/=£190,476.
2.Needtoexchange$384,762toobtainthe£190,476(£190,476×$=$384,762.
3.Attheendof180days,need$400,152torepayloan($384,762×=$400,152.
13.AssumethatCooperCo.willnotuseitscashbalancesinamoneymarkethedge.When
decidingbetweenaforwardhedgeandamoneymarkethedge,it_______determine
whichhedgeispreferablebeforeimplementingthehedge.It_______determinewhether
eitherhedgewilloutperformanunhedgedstrategybeforeimplementingthehedge.
A)can;can
B)can;cannot
C)cannot;can
D)cannot;cannot
ANSWER:
B
14.FoghatCo.has1,000,000eurosasreceivablesduein30days,andiscertainthatthe
eurowilldepreciatesubstantiallyovertime.Assumingthatthefirmiscorrect,theideal
strategyisto:
A)selleurosforward.
B)purchaseeurocurrencyputoptions.
C)purchaseeurocurrencycalloptions.
D)purchaseeurosforward.
E)remainunhedged.
ANSWER:
A
15.SpearsCo.willreceiveSF1,000,000in30days.Usethefollowinginformationto
determinethetotaldollaramountreceived(afteraccountingfortheoptionpremium)if
thefirmpurchasesandexercisesaputoption:
Exerciseprice=$.61
Premium=$.02
Spotrate=$.60
Expectedspotratein30days=$.56
30-dayforwardrate=$.62
A)$630,000.
B)$610,000.
C)$600,000.
D)$590,000.
E)$580,000.
ANSWER:
D
SOLUTION:
($.61-$.02)×SF1,000,000=$590,000
16.A_______involvesanexchangeofcurrenciesbetweentwoparties,withapromiseto
re-exchangecurrenciesataspecifiedexchangerateandfuturedate.
A)long-termforwardcontract
B)currencyswap
C)parallelloan
D)moneymarkethedge
ANSWER:
C
17.Ifinterestrateparityexistsandtransactionscostsarezero,thehedgingofpayablesin
euroswithaforwardhedgewill_______.
A)havethesameresultasacalloptionhedgeonpayables
B)havethesameresultasaputoptionhedgeonpayables
C)havethesameresultasamoneymarkethedgeonpayables
D)requiremoredollarsthanamoneymarkethedge
E)AandD
ANSWER:
C
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