Reference no: EM13658622

1. A US exporter is concerned about the deppreciation of Euro against USD due to Euro receivables of EUR10,000,000 in three months. To hedge (protect himself/herself) the position, exporter decides to use futures markets. Currently CME (Chicago Mercantile Exchange) EURO Futures contracts (125,000 each) are traded at USD1.2814. Spot rate is Bid 1.2751- Ask 2756 ($ per €). Suppose the exporter takes an equal futures position to its cash market position (EUR10m) at the Futures contract price of $1.2814. Provided that futures contract price and spot rates are $1.2850/Euro and $1.2935/Euro respectively when the hedge is liquidated, what should be the unit receipt per EUR for the US exporter in USD terms.

a. 1.2899

b. 1.2971

c. 1.2814

d. 1.2935

2. Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for € 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives for its receivables to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

· The spot exchange rate is $1.1740/€
· The six month forward rate is $1.1480/€
· Plains States' cost of capital is 12% per annum
· The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)
· The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)
· The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)
· The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)
· December put options for €625,000; strike price $1.18, premium price is 1.5%
· Plains States' forecast for 6-month spot rates is $1.19/€
· The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/€

If Plains States locks in the forward hedge at $1.1480/€, and the spot rate when the transaction was recorded on the books was $1.174/€, this will result in a "foreign exchange loss" accounting transaction of ________.

There is not enough information to answer this question.

$0

$32,500

This was not a loss; it was a gain of $32,500.

3. Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for € 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives for its receivables to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

· The spot exchange rate is $1.1740/€
· The six month forward rate is $1.1480/€
· Plains States' cost of capital is 12% per annum
· The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)
· The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)
· The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)
· The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)
· December put options for €625,000; strike price $1.18, premium price is 1.5%
· Plains States' forecast for 6-month spot rates is $1.19/€
· The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/€

Plains States would be ________ by an amount equal to ________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct.

better off; $52,500

worse off; $10,000

better off; $10,000

worse off; $52,500

4. Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for € 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives for its receivables to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

· The spot exchange rate is $1.1740/€
· The six month forward rate is $1.1480/€
· Plains States' cost of capital is 12% per annum
· The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)
· The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)
· The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)
· The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)
· December put options for €625,000; strike price $1.18, premium price is 1.5%
· Plains States' forecast for 6-month spot rates is $1.19/€
· The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/€

What is the cost of a put option hedge for Plains States' Euro receivable contract? (Hint: What is the total premium cost in 6 months? Don't forget the time value of money.)

$23,296

$25,800

$22,013

$21,045

5. Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for € 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives for its receivables to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

· The spot exchange rate is $1.1740/€
· The six month forward rate is $1.1480/€
· Plains States' cost of capital is 12% per annum
· The Euro zone 6-month borrowing rate is 7% per annum (or 3.5% for 6 months)
· The Euro zone 6-month lending rate is 5% per annum (or 2.5% for 6 months)
· The U.S. 6-month borrowing rate is 6% per annum (or 3% for 6 months)
· The U.S. 6-month lending rate is 4.5% per annum (or 2.25% for 6 months)
· December put options for €625,000; strike price $1.18, premium price is 1.5%
· Plains States' forecast for 6-month spot rates is $1.19/€
· The budget rate, or the lowest acceptable sales price for this project, is $1,425,000 or $1.14/€

Plains States could hedge the Euro receivables in the money market. Using the information provided how much would the money market hedge return in six months assuming Plains States reinvests the proceeds at the U.S. investment rate?

$1,449,777

$1,502,947

$1,250,000

$1,460,411

6. What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by any unexpected change in exchange rates?

operating exposure

accounting exposure

translation exposure

transaction exposure

7. Firm "M" is a U.S. company that has exposure to the Swiss francs (SF) and Danish kroner (DK). It has net outflows of SF200 million and net inflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.20. Firm "M" has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens:

firm "M" will benefit, because the dollar value of its SF position exceeds the dollar value of its DK position

firm "M" will benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.

firm "M" will be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.

firm "M" will be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position

8. A U.S. firm with no subsidiaries presently has sales to Brazil amounting to R200 million, while its Real -denominated expenses amount to R100 million. If it shifts its material orders from its Brazilian suppliers to U.S. suppliers, it could reduce Real-denominated expenses by R20 million and increase dollar-denominated expenses by $15 million. This strategy would _______ the firm's exposure to changes in the Real's movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the Real is valued _______ relative to the dollar.

reduce; high

reduce; low

increase; low

increase; high

9. ________ occur as a result of changes in the value of currency, whereas ________ occur as a result of ongoing business activities.

Translation gains or losses; operating gains or losses

Swap losses; translation gains or losses

Operating gains or losses; translation gains or losses

all of the above

10. Brimmo Motorcycles Inc., a U.S.-based firm, manufactures and sells electric motorcycles both domestically and internationally. A sudden and unexpected appreciation of the U.S. dollar should allow sales to ________ at home and ________ abroad. (Assume other factors remain unchanged.)

decrease; decrease

increase; increase

decrease; increase

increase; decrease

11. Each of the following is another name for operating exposure EXCEPT:

strategic exposure.

accounting exposure.

economic exposure.

competitive exposure.

12. The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and actually filling or delivering it. Finally, the time it takes to get paid after delivering the product. In order, these stages of transaction exposure may be identified as:

quotation, backlog, and billing exposure.

backlog, quotation, and billing exposure.

quotation, billing, and backlog exposure.

billing, backlog, and quotation exposure.

13. A US exporter is concerned about the depreciation of JPY against USD due to JPY receivables of JPY400,000,000 on February 1st ( in 167 days). To hedge (protect himself/herself) the position, exporter decides to use futures markets. Currently CME (Chicago Mercantile Exchange) JPY contracts (12,500,000 each) with closest maturity are traded at USD0.8350 per 100 JPY. Futures contract expires 18 days after on February 19th. . Suppose the exporter takes a futures position equal to 50% of its cash position (JPY200m) at USD0.8350. Also Company treasurer buys an over the counter put option for the JPY150m portion of the expected cash inflow at a strike price of JPY120/$, at 2% (2% is the cost of premium) and leaves JPY50m portion of the exposure uncovered. At the time the option was purchased, the spot rate was JPY117/$. On February 1st, Futures contract price is USD0.8130 per 100 JPY and the JPY per $ spot price is 122. Calculate the effective amount of USD company will clear on February 1st. What is the effective JPY cost of acquiring one USD?

4,321,477

5,236,477

3,317,539

None of the above