MC Chapter 11�Managing Transaction Exposure

MC Chapter 11�Managing Transaction Exposure -...

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Chapter 11—Managing Transaction Exposure 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: a. positive. b. negative. c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. d. zero. ANS: D PTS: 1 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: a. positive. b. negative. c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount. d. zero. ANS: A PTS: 1 3. Assume the following information: U.S. deposit rate for 1 year = 11% U.S. borrowing rate for 1 year = 12% Swiss deposit rate for 1 year = 8% Swiss borrowing rate for 1 year = 10% Swiss forward rate for 1 year = $.40 Swiss franc spot rate = $.39 Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge? a. $234,000. b. $238,584. c. $240,000. d. $236,127. ANS: C SOLUTION: SF600,000 × $.40 = $240,000 PTS: 1 4. Assume the following information: U.S. deposit rate for 1 year = 11% U.S. borrowing rate for 1 year = 12% New Zealand deposit rate for 1 year = 8% New Zealand borrowing rate for 1 year = 10% New Zealand dollar forward rate for 1 year = $.40 New Zealand dollar spot rate = $.39
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Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge? a. $238,584. b. $240,000. c. $234,000. d. $236,127. ANS: D SOLUTION: 1. Borrow NZ$545,455 (NZ$600,000/1.1) = NZ$545,455. 2. Convert NZ$545,455 to $212,727 (at $.39 per NZ$). 3. Invest $212,727 to accumulate $236,127 ($212,727 × 1.11) = $236,127. PTS: 1 5. An example of cross-hedging is: a. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency. b. use the forward market to sell forward whatever currencies you will receive. c. use the forward market to buy forward whatever currencies you will receive. d. B and C ANS: A PTS: 1 6. Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm? a. purchase a currency put option in British pounds. b. sell pounds forward. c.
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MC Chapter 11�Managing Transaction Exposure -...

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