1. Award: 1.00 point  

Transaction exposure is defined as

 the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to
unexpected exchange rate changes.

 the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.

 the potential that the firm's consolidated financial statement can be affected by changes in exchange rates.

 ex post and ex ante currency exposures.

References

Multiple Choice Difficulty: 1 Easy

 
 2. Award: 1.00 point  

Which of the following is not a type of foreign currency exposure?

 Exchange rate exposure

 Economic exposure

 Translation exposure

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 3. Award: 1.00 point
 

__________ type of exposure is defined as the extent to which the value of the firm would be affected by unanticipated changes in exchange
rates.

 Exchange rate exposure

 Economic exposure

 Translation exposure

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 4. Award: 1.00 point
 

Which of the following is not a type of financial contract?

 Forward contract

 Money market instrument

 Options contract

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 5. Award: 1.00 point  

Which of the following is not a type of operational technique?

 Swap strategy

 Choice of the invoice currency

 Lead/lag strategy

 Exposure netting

References

Multiple Choice Difficulty: 1 Easy

 
 6. Award: 1.00 point  

The most direct and popular way of hedging transaction exposure is by

 exchange-traded futures options.

 currency forward contracts.

 foreign currency warrants.

 borrowing and lending in the domestic and foreign money markets.

References

Multiple Choice Difficulty: 1 Easy

  
 7. Award: 1.00 point
 

If you have a long position in a foreign currency, you can hedge with

 a short position in an exchange-traded futures option.

 a short position in a currency forward contract.

 a short position in foreign currency warrants.

 borrowing (not lending) in the domestic and foreign money markets.

References

Multiple Choice Difficulty: 1 Easy

 
 8. Award: 1.00 point  

If you owe a foreign currency denominated debt, you can hedge with

 a short position in a currency forward contract.

 a short position in an exchange-traded futures option.

 buying the foreign currency today and investing it in the foreign county.

 a long position in a currency forward contract, or buying the foreign currency today and investing it in the foreign county.

References

Multiple Choice Difficulty: 1 Easy

 
 9. Award: 1.00 point  

If you own a foreign currency denominated bond, you can hedge with

 a long position in a currency forward contract.

 a long position in an exchange-traded futures option.

 buying the foreign currency today and investing it in the foreign county.

 a swap contract where pay the cash flows of the bond in exchange for dollars.

References

Multiple Choice Difficulty: 1 Easy

  
 10. Award: 1.00 point  

The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes
in the exchange rate is

 transaction exposure.

 translation exposure.

 economic exposure.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 11. Award: 1.00 point
 

The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is

 transaction exposure.

 translation exposure.

 economic exposure.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 12. Award: 1.00 point  

The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is

 transaction exposure.

 translation exposure.

 economic exposure.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 13. Award: 1.00 point  

With any hedge,

 your losses on one side should about equal your gains on the other side.

 you should try to make money on both sides of the transaction; that way you make money coming and going.

 you should spend at least as much time working the hedge as working the underlying deal itself.

 you should agree to anything your banker puts in front of your face.

References

Multiple Choice Difficulty: 1 Easy

 
 14. Award: 1.00 point  

With any successful hedge,

 you are guaranteed to lose money on one side.

 you can avoid the accounting ramifications of a loss on one side by keeping it off the books.

 you are guaranteed to lose money on one side, but you can avoid the accounting ramifications of a loss on one side by keeping it off
the books.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 15. Award: 1.00 point  

The choice between a forward market hedge and a money market hedge often comes down to

 interest rate parity.

 option pricing.

 flexibility and availability.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 16. Award: 1.00 point
 

Since a corporation can hedge exchange rate exposure at low cost

 there is no benefit to the shareholders in an efficient market.

 shareholders would benefit from the risk reduction that hedging offers.

 the corporation's banker would benefit from the risk reduction that hedging offers.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 17. Award: 1.00 point
 

A CFO should be least worried about

 transaction exposure.

 translation exposure.

 economic exposure.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 18. Award: 1.00 point  

Exchange rate risk of a foreign currency payable is an example of

 transaction exposure.

 translation exposure.

 economic exposure.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 19. Award: 1.00 point
 

A stock market investor would pay attention to

 anticipated changes in exchange rates that have been already discounted and reflected in the firm's value.

 unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value.

 anticipated changes in exchange rates that have been already discounted and reflected in the firm's value, as well as unanticipated
changes in exchange rates that have not been discounted and reflected in the firm's value.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 20. Award: 1.00 point  

Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million payable in one year. The money market interest rates
and foreign exchange rates are given as follows:
 
 
The U.S. one-year interest rate:   6.10% per annum
The euro zone one-year interest rate:   9.00% per annum
The spot exchange rate: $ 1.50/€
The one-year forward exchange rate $ 1.46/€
 
Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in exchange for a predetermined amount of U.S.
dollars. Which of the following is/are true? On the maturity date of the contract Boeing will
 
(i) have to deliver €10 million to the bank (the counter party of the forward contract).
(ii) take delivery of $14.6 million
(iii) have a zero net euro exposure
(iv) have a profit, or a loss, depending on the future changes in the exchange rate, from this British sale.

 (i) and (iv)

 (ii) and (iv)

 (ii), (iii), and (iv)

 (i), (ii), and (iii)

$14.6 million = $1.46 × €10,000,000. Additionally, the net euro exposure is zero because the euro receivable offsets the euro payable.

References

Multiple Choice Difficulty: 2 Medium

  
 21. Award: 1.00 point
 

Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million payable in one year. The money market interest rates
and foreign exchange rates are given as follows:
 
 
The U.S. one-year interest rate:   6.10% per annum
The euro zone one-year interest rate:   9.00% per annum
The spot exchange rate: $ 1.50/€
The one-year forward exchange rate $ 1.46/€
 
Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in exchange for a predetermined amount of U.S.
dollars. Suppose that on the maturity date of the forward contract, the spot rate turns out to be $1.40/€ (i.e. less than the forward rate of $1.46/€).
Which of the following is true?

 Boeing would have received $14.6 million, rather than $14.0 million, had it not entered into the forward contract.

 Boeing lost $0.6 million from forward hedging.

 Boeing would have received only $14.0 million, rather than $14.6 million, had it not entered into the forward contract. Additionally,
Boeing gained $0.6 million from forward hedging.

 none of the options

$14,000,000 = $1.40 × €10,000,000 and $14,600,000 = $1.46 × €10,000,000. Gain = (F − ST) × €10,000,000 = ($1.46 − $1.40) × €10,000,000 =
$600,000, or $0.6 million.

References

Multiple Choice Difficulty: 2 Medium

 
 22. Award: 1.00 point  

Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an Italian firm for €1,000,000 worth of bicycles. Payment from the
Italian firm (in €) is due in twelve months. Your firm wants to hedge the receivable into pounds. Not dollars. Use the following table for exchange
rate data.
 
Country U.S.S equiv. Currency per U.S.$
  Tuesday Monday Tuesday Monday
Britain(pound)£62,500 1.6000 1.6100 0.625 0.6211
1 Month Forward 1.6100 1.6300 0.6211 0.6173
3 Months Forward 1.6300 1.6600 0.6173 0.6024
6 Months Forward 1.6600 1.7200 0.6024 0.5814
12 Months Forward 1.7200 1.8000 0.5814 0.5556
Euro €62,500 1.2000 1.2000 0.833333 0.833333
1 Month Forward 1.2100 1.2100 0.82645 0.82645
3 Months Forward 1.2300 1.2300 0.813008 0.813008
6 Months Forward 1.2600 1.2600 0.793651 0.793651
12 Months Forward 1.2900 1.3200 0.775194 0.7575758
 
Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of what type.

 Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at spot,
receive $1,165,048.54. Convert dollars to pounds at spot, receive £728,155.34.

 Sell €1m forward using 16 contracts at $1.20 per €1. Buy £750,000 forward using 12 contracts at $1.60 per £1.

 Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.

 Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1. Buy £750,000 forward using 12 contracts at the forward rate of
$1.72 per £1.

References

Multiple Choice Difficulty: 2 Medium

  
 23. Award: 1.00 point  

A Japanese exporter has a €1,000,000 receivable due in one year. Spot and forward exchange rate data is given:
 
Spot exchange rates   1-year Forward Rates   Contract size
  $1.20 = €1.00       $1.25 = €1.00     € 62,500  
  $1.00 = ¥ 100       $1.00 = ¥ 120     ¥12,500,000  
 
The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using forward contracts

 Borrow €970,873.79 today; in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at
spot, receive $1,165,048.54. Convert dollars to yen at spot, receive ¥116,504,854.

 Sell €1m forward using 16 contracts at the forward rate of $1.20 per €1. Buy ¥150,000,000 forward using 11.52 contracts, at the forward
rate of $1.00 = ¥120.

 Sell €1m forward using 16 contracts at the forward rate of $1.25 per €1. Buy ¥150,000,000 forward using 12 contracts, at the forward
rate of $1.00 = ¥120.

 none of the options

References

Multiple Choice Difficulty: 2 Medium

 
 24. Award: 1.00 point  

Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rate is
$1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year. What is the fairest
exchange rate to use?

 $1.85 = £1.00

 $1.8750 = £1.00

 $1.90 = £1.00

 none of the options

References

Multiple Choice Difficulty: 2 Medium

 
 25. Award: 1.00 point
 

Your firm has a British customer that is willing to place a $1 million order (with payment due in 6 months), but insists upon paying in pounds instead
of dollars.

 The customer essentially wants you to discount your price by the value of a put option on pounds.

 The customer essentially wants you to discount your price by the value of a call option on pounds.

 The customer essentially wants you to discount your price by the sum of the values of a call and put option on pounds.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 26. Award: 1.00 point  

Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an American firm for $1,000,000 worth of bicycles. Payment from
the American firm (in U.S. dollars) is due in six months. Detail a strategy using futures contracts that will hedge your exchange rate risk.
 
Country U.S.$ equiv. Currency per U.S.$
  Tuesday Monday Tuesday Monday
Britain(pound)£62,500 1.8000 1.8100 0.5556 0.5525
1 Month Forward 1.8100 1.8300 0.5525 0.5464
3 Months Forward 1.8300 1.8600 0.5464 0.5376
6 Months Forward 1.8600 1.8200 0.5376 0.5495
12 Months Forward 1.8200 1.8000 0.5495 0.5556

 Go short 12 six-month forward contracts; pay £555,600.

 Go short 16 six-month forward contracts. Pay approximately £537,600.

 Go long 12 six-month forward contracts. Receive approximately £549,500.

 Go long 16 six-month forward contracts; raise approximately £537,600.

You should use 16 contracts, given $1,000,000 / £62,500 = 16. Next, (£1 / $1.86) × $1,000,000 = £537,634

References

Multiple Choice Difficulty: 2 Medium

 
 27. Award: 1.00 point
 

Your firm is a U.S.-based exporter of bicycles. You have sold an order to a French firm for €1,000,000 worth of bicycles. Payment from the French
firm (in euro) is due in three months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and how much (in $) your firm will have.
 
Country U.S.$ equiv. Currency per U.S.$
  Tuesday Monday Tuesday Monday
Britain(pound)£62,500 1.6000 1.6100 0.625 0.6211
1 Month Forward 1.6100 1.6300 0.6211 0.6173
3 Months Forward 1.6300 1.6600 0.6173 0.6024
6 Months Forward 1.6600 1.7200 0.6024 0.5814
12 Months Forward 1.7200 1.8000 0.5814 0.5556

 Go short 12 six-month forward contracts; pay $1,630,000.

 Go short 16 six-month forward contracts; pay $1,630,000.

 Go long 16 six-month forward contracts; raise $1,660,000.

 Go long 12 six-month forward contracts; receive $1,660,000.

You should use 16 contracts, given £1,000,000 / £62,500 = 16. Next, the 3-month forward rate is $1.63 per euro. Therefore, you will pay $1,630,000
= £1,000,000 × $1.63

References

Multiple Choice Difficulty: 2 Medium

  
 28. Award: 1.00 point
 

Your firm is a U.K.-based exporter of bicycles. You have sold an order to a French firm for €1,000,000 worth of bicycles. Payment from the French
firm (in euro) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.

 Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.

 Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.

 Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.

 none of the options

100 contracts = €1,000,000 / €10,000; $1,600,000 = €1,000,000 × $1.60; Solve the proportion for X: ($1,600,000 / X) = ($2 / £1), where X =
£800,000. Next, £800,000 / £10,000 = 80 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 29. Award: 1.00 point
 

Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm for €1,000,000 worth of bicycles. Payment (in euro) is
due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of
what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.

 Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.

 Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.

 Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.

 none of the options

100 contracts = €1,000,000 / €10,000; $1,600,000 = €1,000,000 × $1.60; Solve the proportion for X: ($1,600,000 / X) = ($2 / £1), where X =
£800,000. Next, £800,000 / £10,000 = 80 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 30. Award: 1.00 point
 

Your firm is a Swiss exporter of bicycles. You have sold an order to a French firm for €1,000,000 worth of bicycles. Payment from the French firm (in
euro) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts
of what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go short 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures contracts.

 Go long 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures contracts.

 Go long 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures contracts.

 Go short 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures contracts.

 none of the options

100 contracts = €1,000,000 / €10,000; $1,600,000 = €1,000,000 × $1.60; Solve the proportion for X: ($1,600,000 / X) = ($1 / SFr 1), where X = SFr
1,600,000. Next, SFr 1,600,000 / SFr 10,000 = 160 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 31. Award: 1.00 point  

Your firm is a Swiss importer of bicycles. You have placed an order with an Italian firm for €1,000,000 worth of bicycles. Payment (in euro) is due in
12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of what type
and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go short 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures contracts.

 Go long 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures contracts.

 Go long 100 12-month euro futures contracts; and short 160 12-month Swiss franc futures contracts.

 Go short 100 12-month euro futures contracts; and long 160 12-month Swiss franc futures contracts.

 none of the options

100 contracts = €1,000,000 / €10,000; $1,600,000 = €1,000,000 × $1.60; Solve the proportion for X: ($1,600,000 / X) = ($1 / SFr 1), where X = SFr
1,600,000. Next, SFr 1,600,000 / SFr 10,000 = 160 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 32. Award: 1.00 point  

Your firm is an Italian exporter of bicycles. You have sold an order to a British firm for £1,000,000 worth of bicycles. Payment from the customer (in
pounds sterling) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.

 Go short 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.

 Go long 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.

 Go short 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.

 none of the options

100 contracts = £1,000,000 / £10,000; $2,000,000 = £1,000,000 × $2; Solve the proportion for X: ($2,000,000 / X) = ($1.60 / €1), where X =
€1,250,000. Next, €1,250,000 / €10,000 = 125 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 33. Award: 1.00 point
 

Your firm is an Italian importer of bicycles. You have placed an order with a British firm for £1,000,000 worth of bicycles. Payment (in pounds
sterling) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.

 Go short 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.

 Go long 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.

 Go short 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.

 none of the options

100 contracts = £1,000,000 / £10,000; $2,000,000 = £1,000,000 × $2; Solve the proportion for X: ($2,000,000 / X) = ($1.60 / €1), where X =
€1,250,000. Next, €1,250,000 / €10,000 = 125 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 34. Award: 1.00 point
 

Your firm is a U.K.-based exporter of bicycles. You have sold an order to a Swiss firm for SFr. 1,000,000 worth of bicycles. Payment from the Swiss
firm (in Swiss francs) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.

 Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.

 Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.

 Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.

 none of the options

100 contracts = SFr. 1,000,000 / SFr. 10,000; $1,000,000 = SFr. 1,000,000 × $1; Solve the proportion for X: ($1,000,000 / X) = ($2 / £1), where X =
£500,000. Next, £500,000/ £10,000 = 50 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 35. Award: 1.00 point
 

Your firm is a U.K.-based importer of bicycles. You have placed an order with a Swiss firm for SFr. 1,000,000 worth of bicycles. Payment (in Swiss
francs) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.

 Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.

 Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.

 Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.

 none of the options

100 contracts = SFr. 1,000,000 / SFr. 10,000; $1,000,000 = SFr. 1,000,000 × $1; Solve the proportion for X: ($1,000,000 / X) = ($2 / £1), where X =
£500,000. Next, £500,000/ £10,000 = 50 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 36. Award: 1.00 point
 

Your firm is a Swiss exporter of bicycles. You have sold an order to a British firm for £1,000,000 worth of bicycles. Payment from the British firm (in
pounds sterling) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go short 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts.

 Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures contracts.

 Go short 100 12-month pound futures contracts; and short 200 12-month SFr. futures contracts.

 Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts.

 none of the options

100 contracts = £1,000,000 / £10,000; $2,000,000 = £1,000,000 × $2; Solve the proportion for X: ($2,000,000 / X) = ($1 / SFr. 1), where X = SFr.
2,000,000. Next, SFr. 2,000,000/ SFr. 10,000 = 200 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 37. Award: 1.00 point
 

Your firm is a Swiss importer of bicycles. You have placed an order with a British firm for £1,000,000 worth of bicycles. Payment (in pounds sterling)
is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of
what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go short 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts.

 Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures contracts.

 Go short 100 12-month pound futures contracts.

 Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts.

 none of the options

100 contracts = £1,000,000 / £10,000; $2,000,000 = £1,000,000 × $2; Solve the proportion for X: ($2,000,000 / X) = ($1 / SFr. 1), where X = SFr.
2,000,000. Next, SFr. 2,000,000/ SFr. 10,000 = 200 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 38. Award: 1.00 point  

Your firm is an Italian exporter of bicycles. You have sold an order to a Swiss firm for SFr. 2,000,000 worth of bicycles. Payment from the customer
(in Swiss francs) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how
many contracts of what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.

 Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.

 Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.

 Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.

 none of the options

200 contracts = SFr. 2,000,000 / SFr. 10,000; $2,000,000 = SFr. 2,000,000 × $1; Solve the proportion for X: ($2,000,000 / X) = ($1.60 / €1), where X
= €1,250,000. Next, €1,250,000 / €10,000 = 125 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 39. Award: 1.00 point  

Your firm is an Italian importer of bicycles. You have placed an order with a Swiss firm for SFr. 2,000,000 worth of bicycles. Payment (in francs) is
due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of
what type and maturity.
 
    U.S. $ equiv.   Currency per U.S. $
Contract Size Country Tuesday   Monday   Tuesday   Monday
£10,000   Britain (pound) $ 1.9600     $ 1.9400     £ 0.5102     £ 0.5155  
      1 month forward $ 1.9700     $ 1.9500     £ 0.5076     £ 0.5128  
      3 months forward $ 1.9800     $ 1.9600     £ 0.5051     £ 0.5102  
      6 months forward $ 1.9900     $ 1.9700     £ 0.5025     £0.5076  
      12 months forward $2.0000     $ 1.9800     £0.5000     £ 0.5051  
€10,000   Euro $ 1.5600     $ 1.5400     € 0.6410     €0.6494  
      1 month forward $ 1.5700     $ 1.5500     € 0.6369     €0.6452  
      3 months forward $ 1.5800     $ 1.5600     € 0.6329     € 0.6410  
      6 months forward $ 1.5900     $ 1.5700     € 0.6289     €0.6369  
      12 months forward $ 1.6000     $ 1.5800     € 0.6250     €0.6329  
SFr.10,000   Swiss franc $0.9200     $0.9000     SFr. 1.0870     SFr. 1.1111  
      1 month forward $ 0.9400     $0.9200     SFr. 1.0638     SFr. 1.0870  
      3 months forward $0.9600     $ 0.9400     SFr. 1.0417     SFr. 1.0638  
      6 months forward $0.9800     $0.9600     SFr. 1.0204     SFr. 1.0417  
      12 months forward $ 1.0000     $0.9800     SFr. 1.0000     SFr. 1.0204  

 Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.

 Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.

 Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.

 Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.

 none of the options

200 contracts = SFr. 2,000,000 / SFr. 10,000; $2,000,000 = SFr. 2,000,000 × $1; Solve the proportion for X: ($2,000,000 / X) = ($1.60 / €1), where X
= €1,250,000. Next, €1,250,000 / €10,000 = 125 contracts.

References

Multiple Choice Difficulty: 2 Medium

  
 40. Award: 1.00 point
 

Your firm is a U.K.-based exporter of bicycles. You have sold an order to a French firm for €1,000,000 worth of bicycles. Payment from the French
firm (in euro) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a pound-denominated receivable with
a one-year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 £803,721.49

 €800,000

 £780,312.13

 £72,352.94

Step 1:€1,000,000 / 1.02 = €980,392; Step 2: (€1 / $1.56) = (€980,392 / X), where X = $1,529,411.77; Step 3: ($1.96 / £1) = ($1,529,411.77 / X), where X
= £780,312.12; Step 4: £780,312.12 × (1.03) = £803,721.49.

References

Multiple Choice Difficulty: 2 Medium

 
 41. Award: 1.00 point  

Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm for €1,000,000 worth of bicycles. Payment (in euro) is
due in 12 months. Use a money market hedge to redenominate this one-year receivable into a pound-denominated receivable with a one-year
maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 £803,721.49

 €800,000

 £780,312.13

 £72,352.94

Step 1: €1,000,000 / 1.02 = €980,392; Step 2: (€1 / $1.56) = (€980,392 / X), where X = $1,529,411.77; Step 3: ($1.96 / £1) = ($1,529,411.77 / X), where X
= £780,312.12; Step 4: £780,312.12 × (1.03) = £803,721.49.

References

Multiple Choice Difficulty: 2 Medium

  
 42. Award: 1.00 point  

Your firm is a Swiss exporter of bicycles. You have sold an order to a French firm for €1,000,000 worth of bicycles. Payment from the French firm (in
euro) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a Swiss franc-denominated receivable with a
one-year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 SFr. 1,728,900.26

 SFr. 1,600,000

 SFr. 1,544,705.88

 SFr. 800,000

Step 1: €1,000,000 / 1.02 = €980,392; Step 2: (€1 / $1.56) = (€980,392 / X), where X = $1,529,411.77; Step 3: ($0.92 / SFr. 1) = ($1,529,411.77 / X),
where X = SFr. 1,662,404.1; Step 4: SFr. 1,662,404.10 × (1.04) = SFr. 1,728,900.26.

References

Multiple Choice Difficulty: 2 Medium

 
 43. Award: 1.00 point  

Your firm is a Swiss importer of bicycles. You have placed an order with an Italian firm for €1,000,000 worth of bicycles. Payment (in euro) is due in
12 months. Use a money market hedge to redenominate this one-year receivable into a Swiss franc-denominated receivable with a one-year
maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 SFr. 1,728,900.26

 SFr. 1,600,000

 SFr. 1,544,705.88

 SFr. 800,000

Step 1: €1,000,000 / 1.02 = €980,392; Step 2: (€1 / $1.56) = (€980,392 / X), where X = $1,529,411.77; Step 3: ($0.92 / SFr. 1) = ($1,529,411.77 / X),
where X = SFr. 1,662,404.1; Step 4: SFr. 1,662,404.10 × (1.04) = SFr. 1,728,900.26.

References

Multiple Choice Difficulty: 2 Medium

  
 44. Award: 1.00 point  

Your firm is an Italian exporter of bicycles. You have sold an order to a British firm for £1,000,000 worth of bicycles. Payment from the customer (in
pounds sterling) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable
with a one-year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 €1,225,490.20

 €1,244,212.10

 €1,250,000

 €1,219,815.78

Step 1: £1,000,000 / 1.03 = £970,873.79; Step 2: (£1 / $1.96) = (£970,873.79 / X), where X =$1,902,912.62; Step 3: ($1.56 / €1) = ($1,902,912.62 / X),
where X = €1,219,815.78; Step 4: €1,219,815.78 × (1.02) =€1,244,212.10 .

References

Multiple Choice Difficulty: 2 Medium

 
 45. Award: 1.00 point  

Your firm is an Italian importer of British bicycles. You have placed an order with a British firm for £1,000,000 worth of bicycles. Payment (in pounds
sterling) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-
year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 €1,225,490.20

 €1,244,212.10

 €1,250,000

 €1,219,815.78

Step 1: £1,000,000 / 1.03 = £970,873.79; Step 2: (£1 / $1.96) = (£970,873.79 / X), where X =$1,902,912.62; Step 3: ($1.56 / €1) = ($1,902,912.62 / X),
where X = €1,219,815.78; Step 4: €1,219,815.78 × (1.02) = €1,244,212.10.

References

Multiple Choice Difficulty: 2 Medium

  
 46. Award: 1.00 point
 

Your firm is a U.K.-based exporter of bicycles. You have sold an order to a Swiss firm for SFr. 1,000,000 worth of bicycles. Payment from the Swiss
firm (in Swiss francs) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a euro-denominated
receivable with a one-year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 £500,000

 £464,874.41

 £446,730.77

 £509,900.99

Step 1: SFr. 1,000,000 / 1.04 = SFr. 961,538.46; Step 2: (SFr. 1 / $0.92) = (SFr. 961,538.46 / X), where X = $884,615.38; Step 3: ($1.96 / £1) =
($884,615.38 / X), where X = £451,334.38; Step 4: £451,334.38 × (1.03) = £464,874.41.

References

Multiple Choice Difficulty: 2 Medium

 
 47. Award: 1.00 point  

Your firm is a U.K.-based importer of bicycles. You have placed an order with a Swiss firm for SFr. 1,000,000 worth of bicycles. Payment (in Swiss
francs) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable with a one-
year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 £500,000

 £464,874.41

 £446,730.77

 £509,900.99

Step 1: SFr. 1,000,000 / 1.04 = SFr. 961,538.46; Step 2: (SFr. 1 / $0.92) = (SFr. 961,538.46 / X), where X = $884,615.38; Step 3: ($1.96 / £1) =
($884,615.38 / X), where X = £451,334.38; Step 4: £451,334.38 × (1.03) = £464,874.41.

References

Multiple Choice Difficulty: 2 Medium

  
 48. Award: 1.00 point  

Your firm is a Swiss exporter of bicycles. You have sold an order to a British firm for £1,000,000 worth of bicycles. Payment from the British firm (in
pounds sterling) is due in 12 months. Use a money market hedge to redenominate this one-year receivable into a euro-denominated receivable
with a one-year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 SFr. 2,000,000

 SFr. 2,151,118.62

 SFr. 2,068,383.28

 SFr. 1,921,941.75

Step 1: £1,000,000 / 1.03 = £970,873.79; Step 2: (£1 / $1.96) = (£970,873.79 / X), where X =$1,902,912.62; Step 3: ($0.92 / SFr. 1) = ($1,902,912.62 / X),
where X = SFr. 2,068,383.28; Step 4:SFr. 2,068,383.28 × (1.04) = SFr. 2,151,118.62.

References

Multiple Choice Difficulty: 2 Medium

 
 49. Award: 1.00 point
 

Your firm is a Swiss importer of bicycles. You have placed an order with a British firm for £1,000,000 worth of bicycles. Payment (in pounds sterling)
is due in 12 months. Use a money market hedge to redenominate this one-year pound denominated payable into a Swiss franc-denominated
payable with a one-year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 SFr. 2,000,000

 SFr. 2,151,118.62

 SFr. 2,068,383.28

 SFr. 1,921,941.75

Step 1: £1,000,000 / 1.03 = £970,873.79; Step 2: (£1 / $1.96) = (£970,873.79 / X), where X =$1,902,912.62; Step 3: ($0.92 / SFr. 1) = ($1,902,912.62 / X),
where X = SFr. 2,068,383.28; Step 4:SFr. 2,068,383.28 × (1.04) = SFr. 2,151,118.62.

References

Multiple Choice Difficulty: 2 Medium

  
 50. Award: 1.00 point
 

Your firm is an Italian exporter of bicycles. You have sold an order to a Swiss firm for SFr. 2,000,000 worth of bicycles. Payment from the customer
(in Swiss francs) is due in 12 months. Use a money market hedge to redenominate this one-year franc denominated receivable into a euro-
denominated receivable with a one-year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £ 0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 €1,116,826.92

 €1,250,000

 €1,134,122.29

 €1,156,804.73

Step 1: SFr. 2,000,000 / 1.04 = SFr. 1,923,076.92; Step 2: (SFr. 1 / $0.92) = (SFr. 1,923,076.92 / X), where X = $1,769,230.77; Step 3: ($1.56 / €1) =
($1,769,230.77 / X), where X = €1,134,122.29; Step 4: €1,134,122.29 × (1.02) = €1,156,804.73.

References

Multiple Choice Difficulty: 2 Medium

 
 51. Award: 1.00 point  

Your firm is an Italian importer of bicycles. You have placed an order with a Swiss firm for SFr. 2,000,000 worth of bicycles. Payment (in francs) is
due in 12 months. Use a money market hedge to redenominate this one-year franc denominated payable into a euro-denominated payable with a
one-year maturity.
 
Contract Size Country U.S. $ equiv.   Currency per U.S. $      
£10,000   Britain (pound) $ 1.9600     £ 0.5102    interest   APR  
      12 months forward $2.0000     £ 0.5000     rates          
€10,000   Euro $ 1.5600     € 0.6410      i$   =   1%  
      12 months forward $ 1.6000     € 0.6250      i€   =   2%  
SFr.10,000   Swiss franc $0.9200     SFr. 1.0870      i£   =   3%  
      12 months forward $ 1.0000     SFr. 1.0000       iSFr.   =   4%  
 
The following were computed without rounding. Select the answer closest to yours.

 €1,116,826.92

 €1,250,000

 €1,134,122.29

 €1,156,804.73

Step 1: SFr. 2,000,000 / 1.04 = SFr. 1,923,076.92; Step 2: (SFr. 1 / $0.92) = (SFr. 1,923,076.92 / X), where X = $1,769,230.77; Step 3: ($1.56 / €1) =
($1,769,230.77 / X), where X = €1,134,122.29; Step 4: €1,134,122.29 × (1.02) = €1,156,804.73.

References

Multiple Choice Difficulty: 2 Medium

  
 52. Award: 1.00 point  

From the perspective of a corporate CFO, when hedging a payable versus a receivable

 credit risk considerations are more germane for a payable.

 credit risk considerations are more germane for a receivable.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 53. Award: 1.00 point  

Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an Italian firm for €1,000,000 worth of bicycles. Payment from the
Italian firm (in €) is due in twelve months. Your firm wants to hedge the receivable into pounds. Not dollars. Interest rates are 3 percent in €, 2
percent in $ and 4 percent in £.
 
Country U.S.$ equiv. Currency per U.S.$
  Tuesday Monday Tuesday Monday
Britain(pound)£62,500 1.6000 1.6100 0.625 0.6211
1 Month Forward 1.6100 1.6300 0.6211 0.6173
3 Months Forward 1.6300 1.6600 0.6173 0.6024
6 Months Forward 1.6600 1.7200 0.6024 0.5814
12 Months Forward 1.7200 1.8000 0.5814 0.5556
Euro €62,500 1.2000 1.2000 0.833333 0.833333
1 Month Forward 1.2100 1.2100 0.82645 0.82645
3 Months Forward 1.2300 1.2300 0.813008 0.813008
6 Months Forward 1.2600 1.2600 0.793651 0.793651
12 Months Forward 1.2900 1.3200 0.775194 0.7575758
 
Detail a strategy using spot exchange rates and borrowing or lending that will hedge your exchange rate risk.

 Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at spot,
receive $1,165,048.54. Convert dollars to pounds at spot, receive £728,155.34.

 Sell €1m forward using 16 contracts at $1.20 per €1. Buy £750,000 forward using 12 contracts at $1.60 per £1.

 Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1. Buy £750,000 forward using 12 contracts at the forward rate of
$1.72 per £1.

 none of the options

References

Multiple Choice Difficulty: 2 Medium

  
 54. Award: 1.00 point
 

A Japanese exporter has a €1,000,000 receivable due in one year. Detail a strategy using a money market hedge that will eliminate any exchange
rate risk.
 
1-year rates of interest
  Borrowing   Lending
Dollar   4.5%    4.00%
Euro  6.00%    5.25%
Yen   1.00%     0.75%
 
Spot exchange rates   1-year Forward Rates
  $1.25 = €1.00       $1.2262 = €1.00  
  $1.00 = ¥ 100       $ 1.03 = ¥ 100  

 Borrow €970,873.79 today. Convert the euro to dollars at the spot exchange rate, receive $1,165,048.54. Convert these dollars to yen at
the spot rate, receive ¥.

 Borrow €943,396.22 today. Convert the euro to dollars at the spot exchange rate, convert these dollars to yen at the spot rate, receive
¥117,924,528.30.

 Lend €943,396.22 today. Convert the euro to dollars at the spot exchange rate, convert these dollars to yen at the spot rate.

 Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the spot rate; lend €943,396.22 at 5.25 percent.

References

Multiple Choice Difficulty: 2 Medium

 
 55. Award: 1.00 point  

A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the U.S. firm gets paid. To hedge, the U.S. firm bought put options on
the euro with a strike price of $1.65. They paid an option premium $0.01 per euro. If at maturity, the exchange rate is $1.60,

 the firm will realize $1,145,000 on the sale net of the cost of hedging.

 the firm will realize $1,150,000 on the sale net of the cost of hedging.

 the firm will realize $1,140,000 on the sale net of the cost of hedging.

 none of the options

References

Multiple Choice Difficulty: 2 Medium

 
 56. Award: 1.00 point  

Buying a currency option provides

 a flexible hedge against exchange exposure.

 limits the downside risk while preserving the upside potential.

 a right, but not an obligation, to buy or sell a currency.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

  
 57. Award: 1.00 point  

Which of the following options strategies are internally consistent?

 Sell puts and buy calls.

 Buy puts and sell calls.

 Buy puts and buy calls.

 Sell puts and buy calls, as well as buy puts and sell calls.

References

Multiple Choice Difficulty: 1 Easy

 
 58. Award: 1.00 point
 

A Japanese exporter has a €1,000,000 receivable due in one year. Detail a strategy using options that will eliminate exchange rate risk.
 
Listed Options
  Strike   Puts   Calls  
Euro€62,500  $ 1.25 = € 1.00     $ 0.0075 per€   $ 0.01 per€  
Yen¥12,500,000  $ 1.00 = ¥ 100     $ 0.0075 per¥100     0.01 per¥100  

 Buy 16 put options on euro, sell 10 call options on yen.

 Buy 16 put options on euro, buy 10 call options on yen.

 Sell 16 call options on euro, buy 10 put options on yen.

 none of the options

16 put options = €1,000,000 / €62,500; ($1.25 / €1) = (X / €1,000,000), where X = $1,250,000; ($1 / ¥100) = ($1,250,000 = X), where X =
¥1,250,000,000; 10 call options = ¥1,250,000,000 / ¥12,500,000.

References

Multiple Choice Difficulty: 2 Medium

  
 59. Award: 1.00 point  

A Japanese exporter has a €1,000,000 receivable due in one year. Estimate the cost today of an options strategy that will eliminate exchange rate
risk.
 
Listed Options
  Strike   Puts   Calls  
Euro€62,500  $ 1.25 = € 1.00     $ 0.0075 per€   $ 0.01 per€  
Yen¥12,500,000  $ 1.00 = ¥ 100     $ 0.0075 per¥100     0.01 per¥100  

 $20,000

 $5,000

 $12,500

 none of the options

16 put options = €1,000,000 / €62,500; ($1.25 / €1) = (X / €1,000,000), where X = $1,250,000; ($1 / ¥100) = ($1,250,000 = X), where X =
¥1,250,000,000; 10 call options = ¥1,250,000,000 / ¥12,500,000. The 16 put options will cost $7,500 = $.0075 × €1,000,000, and the 10 call options
will cost $12,500 = ($.01 / ¥100) × ¥125,000,000. The total cost is, therefore, $20,000 = $7,500 + $12,500.

References

Multiple Choice Difficulty: 2 Medium

 
 60. Award: 1.00 point  

A Japanese importer has a $1,250,000 payable due in one year.

 
Spot exchange rates   1-year Forward Rates   Contract size
  $1.00 = ¥100       $1.00 = ¥120     ¥12,500,000  
 
Detail a strategy using forward contracts that will hedge his exchange rate risk.

 Go short in 12 yen forward contracts.

 Go long in 12 yen forward contracts.

 Go short in 16 yen forward contracts.

 none of the options

12 contracts = ¥150,000,000 / ¥12,500,000, where ¥150,000,000 = ¥120 × ¥12,500,000.

References

Multiple Choice Difficulty: 2 Medium

  
 61. Award: 1.00 point
 

A Japanese importer has a €1,000,000 payable due in one year.

 
Spot exchange rates   1-year Forward Rates   Contract size
  $1.20 = €1.00       $1.25 = €1.00     € 62,500  
  $1.00 = ¥ 100       $1.00 = ¥ 120     ¥12,500,000  
 
The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using forward contracts that will hedge his exchange
rate risk. Have an estimate of how many contracts of what type.

 Go short in 12 yen forward contracts. Go long in 16 euro contracts.

 Go long in 12 yen forward contracts. Go short in 16 euro contracts.

 Go short in 16 yen forward contracts. Go long in 12 euro contracts.

 none of the options

12 yen forward contracts = ¥150,000,000 / ¥12,500,000, where ¥150,000,000 = ¥120 × ¥12,500,000; 16 euro contracts = €1,000,000 / €62,500.

References

Multiple Choice Difficulty: 2 Medium

 
 62. Award: 1.00 point
 

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. Which of
the following is not part of a money market hedge?

 Buy the ¥750 million at the forward exchange rate.

 Find the present value of ¥750 million at the Japanese interest rate.

 Buy that much yen at the spot exchange rate.

 Invest in risk-free Japanese securities with the same maturity as the accounts payable obligation.

References

Multiple Choice Difficulty: 1 Easy

 
 63. Award: 1.00 point
 

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The
current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the
United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. The
future dollar cost of meeting this obligation using the money market hedge is

 $6,450,000.

 $6,545,400.

 $6,653,833.

 $6,880,734.

¥750,000,000 × [(1.06 × $1) / (1.03 × ¥116] = $6,653,833.28.

References

Multiple Choice Difficulty: 2 Medium

  
 64. Award: 1.00 point  

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The
current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the
United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. The
future dollar cost of meeting this obligation using the forward hedge is

 $6,450,000.

 $6,545,400.

 $6,653,833.

 $6,880,734.

¥750,000,000 × ($1 / ¥109) = $6,880,733.94.

References

Multiple Choice Difficulty: 2 Medium

 
 65. Award: 1.00 point  

To hedge a foreign currency payable,

 buy call options on the foreign currency.

 buy put options on the foreign currency.

 sell call options on the foreign currency.

 sell put options on the foreign currency.

References

Multiple Choice Difficulty: 1 Easy

 
 66. Award: 1.00 point  

To hedge a foreign currency receivable,

 buy call options on the foreign currency with a strike in the domestic currency.

 buy put options on the foreign currency with a strike in the domestic currency.

 sell call options on the foreign currency with a strike in the domestic currency.

 sell put options on the foreign currency with a strike in the domestic currency.

References

Multiple Choice Difficulty: 1 Easy

  
 67. Award: 1.00 point
 

A call option on £1,000 with a strike price of €1,250 is equivalent to

 a put option on €1,250 with an exercise price of €1,000.

 a portfolio of options: a put on €1,250 with a strike price in dollars plus a call on £1,000 with a strike price in dollars.

 a put option on £1,000 with an exercise price of €1,250.

 both a put option on €1,250 with an exercise price of €1,000 and a portfolio of options: a put on €1,250 with a strike price in dollars
plus a call on £1,000 with a strike price in dollars.

References

Multiple Choice Difficulty: 1 Easy

 
 68. Award: 1.00 point  

A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to

 a put option to sell $18,000 at a strike price of $1.80 = £1.00.

 a call option on $18,000 at a strike price of $1.80 = £1.00.

 a put option on £10,000 at a strike price of $1.80 = £1.00.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 69. Award: 1.00 point  

A put option to sell $18,000 at a strike price of $1.80 = £1.00 is equivalent to

 a call option to buy £10,000 at a strike price of $1.80 = £1.00.

 a call option on $18,000 at a strike price of $1.80 = £1.00.

 a put option on £10,000 at a strike price of $1.80 = £1.00.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 70. Award: 1.00 point  

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The
current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the
United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. Assume
that the forward rate is the best predictor of the future spot rate. The future dollar cost of meeting this obligation using the option hedge is

 $6,450,000.

 $6,545,400.

 $6,653,833.

 $6,880,734.

$90,000 × (1.06) = $95,400; $6,450,000 = ¥750,000,000 × $0.0086; Future dollar cost = $6,545,400 = $6,450,000 + $95,400.

References

Multiple Choice Difficulty: 2 Medium

 
 71. Award: 1.00 point  

Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge your liability?

 Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K. at i£.

 Buy a call option on £100,000 with a strike price in dollars.

 Take a long position in a forward contract on £100,000 with a 3-month maturity.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

 
 72. Award: 1.00 point  

Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge your liability?

 Buy a call option on £100,000 with a strike price in euro.

 Buy a put option on £100,000 with a strike price in dollars.

 Buy a call option on £100,000 with a strike price in dollars.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 73. Award: 1.00 point
 

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00.Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For a
U.K. firm to hedge a €100,000 payable,

 buy 10 call options on the euro with a strike in pounds sterling.

 buy 8 put options on the pound with a strike in euro.

 sell 10 call options on the euro with a strike in pounds sterling.

 buy 10 call options on the euro with a strike in pounds sterling and buy 8 put options on the pound with a strike in euro.

References

Multiple Choice Difficulty: 2 Medium

 
 74. Award: 1.00 point  

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00. Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For a
U.K. firm to hedge a €100,000 receivable,

 buy 10 call options on the euro with a strike in pounds sterling.

 buy 10 put options on the euro with a strike in pounds sterling.

 buy 8 call options on the pound with a strike in euro.

 buy 10 put options on the euro with a strike in pounds sterling and buy 8 call options on the pound with a strike in euro.

References

Multiple Choice Difficulty: 2 Medium

 
 75. Award: 1.00 point  

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike
prices of $1.60/€1.00.Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00. For a
U.S. firm to hedge a €100,000 payable,

 buy 10 call options on the euro with a strike in dollars.

 buy 8 put options on the pound with a strike in dollars.

 sell 10 call options on the euro with a strike in dollars.

 sell 8 put options on the pound with a strike in dollars.

References

Multiple Choice Difficulty: 2 Medium

  
 76. Award: 1.00 point  

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike
prices of $1.60/€1.00.Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00. For a
U.S. firm to hedge a €100,000 receivable,

 buy 10 call options on the euro with a strike in dollars.

 buy 10 put options on the pound with a strike in dollars.

 sell 10 call options on the euro with a strike in dollars.

 sell 8 put options on the pound with a strike in dollars.

References

Multiple Choice Difficulty: 2 Medium

 
 77. Award: 1.00 point
 

Suppose that $2 = £1, $1.60 = €1, and the cross-exchange rate is €1.25 = £1.00. If you own a call option on £10,000 with a strike price of $1.50, you
would exercise this option at maturity if

 the $/£ exchange rate is at least $1.60/£.

 the $/€ exchange rate is at least $1.60/€.

 the €/£ exchange rate is at least €1.25/£.

 none of the options

References

Multiple Choice Difficulty: 2 Medium

 
 78. Award: 1.00 point
 

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00.Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For
an Italian firm to hedge a £100,000 payable,

 buy 10 call options on the pound with a strike in euro.

 buy 8 put options on the euro with a strike in pounds.

 buying 10 call options on the pound with a strike in euro or buying 8 put options on the euro with a strike in pounds will both work.

 none of the options

References

Multiple Choice Difficulty: 2 Medium

  
 79. Award: 1.00 point  

Suppose that the exchange rate is €1.25 = £1.00.Options (calls and puts) are available on the London exchange in units of €10,000 with strike
prices of £0.80 = €1.00. Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For a
French firm to hedge a £100,000 receivable,

 buy 10 call options on the pound with a strike in euro.

 buy 10 put options on the pound with a strike in euro.

 buy 8 call options on the euro with a strike in pounds.

 buy 10 put options on the pound with a strike in euro and buy 8 call options on the euro with a strike in pounds.

References

Multiple Choice Difficulty: 2 Medium

 
 80. Award: 1.00 point  

A minor currency is

 anything other than the "big six": U.S. dollar, British pound, Japanese yen, euro, Canadian dollar, and Swiss franc.

 any currency that trades at less than one U.S. dollar.

 any currency that is less than a $20 denomination.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 81. Award: 1.00 point  

A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with

 forward contracts on the euro.

 forward contracts on the ruble.

 forward contracts on the pound.

 forward contracts on the yen.

References

Multiple Choice Difficulty: 2 Medium

  
 82. Award: 1.00 point
 

When cross-hedging,

 try to find one asset that has a positive correlation with another asset.

 the main thing is to find one asset that covaries with another asset in some predictable way.

 try to find one asset that has a negative correlation with another asset.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 83. Award: 1.00 point
 

Your firm is bidding on a large construction contract in a foreign country. This contingent exposure could best be hedged

 with put options on the foreign currency.

 with call options on the foreign currency.

 both with put and call options on the foreign currency, depending upon the specifics ("the rest of the story").

 with futures contracts.

References

Multiple Choice Difficulty: 1 Easy

 
 84. Award: 1.00 point
 

On a recent sale, Boeing allowed British Airways to pay either $18 million or £10 million.

 At the due date, British airways will be indifferent between paying dollars or pounds since they would of course have hedged their
exposure either way.

 Boeing has provided British Airways with a free option to buy $18 million with an exercise price of £10 million.

 Boeing has provided British Airways with a free option to sell up to £10 million with an exercise price of $18 million.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

  
 85. Award: 1.00 point  

Contingent exposure can best be hedged with

 options.

 money market hedging.

 futures.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

 
 86. Award: 1.00 point  

A 5-year swap contract can be viewed as a portfolio of 5 forward contracts with maturities of 1, 2, 3, 4 and 5 years. One important exception is that

 the forward price is the same for the swap contract but not for the forward contracts.

 the swap contract will have daily resettlement.

 the forward contracts will have resettlement risk.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 87. Award: 1.00 point  

To find the swap rate for a 3-year swap, you would

 take the arithmetic average of the 1-, 2-, and 3-year forward rates.

 take the geometric average of the 1-, 2-, and 3-year forward rates.

 bootstrap the LIBOR yield curve.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 88. Award: 1.00 point
 

Generally speaking, a firm with recurrent exposure can best hedge using which product?

 Options

 Swaps

 Futures

 all of the options

References

Multiple Choice Difficulty: 1 Easy

 
 89. Award: 1.00 point
 

The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either
£10,000 or €12,500.

 The seller has given the buyer an at-the-money put option.

 The seller has given the buyer an at-the-money call option.

 The seller has given the buyer both an at-the-money put option, as well as an at-the-money call option.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 90. Award: 1.00 point  

The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either
£10,000 or €12,500.

 The seller has given the buyer an at-the-money put option on euro with a strike in pounds.

 The seller has given the buyer an at-the-money put option on pounds with a strike in euro.

 The seller has given the buyer an at-the-money call option on euro with a strike in pounds.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 91. Award: 1.00 point
 

An exporter can shift exchange rate risk to their customers by

 invoicing in their home currency.

 invoicing in their customer's local currency.

 splitting the difference, and invoicing half of sales in local currency and half of sales in home currency.

 invoicing sales in a currency basket such as the SDR as the invoice currency.

References

Multiple Choice Difficulty: 1 Easy

 
 92. Award: 1.00 point  

An exporter can share exchange rate risk with their customers by

 invoicing in their customer's local currency.

 splitting the difference, and invoicing half of sales in local currency and half of sales in home currency.

 invoicing sales in a currency basket such as the SDR as the invoice currency.

 Both B and C are correct.

References

Multiple Choice Difficulty: 1 Easy

 
 93. Award: 1.00 point
 

An exporter faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of

 paying or collecting early.

 paying or collecting late.

 paying late, collecting early.

 paying early, collecting late.

References

Multiple Choice Difficulty: 1 Easy

  
 94. Award: 1.00 point
 

An exporter faced with exposure to an appreciating currency can reduce transaction exposure with a strategy of

 paying or collecting early.

 paying or collecting late.

 paying late, collecting early.

 paying early, collecting late.

References

Multiple Choice Difficulty: 1 Easy

 
 95. Award: 1.00 point
 

An MNC seeking to reduce transaction exposure with a strategy of leading and lagging

 can probably employ the strategy more effectively with intra firm payables and receivables than with customers or outside suppliers.

 can employ the strategy most easily with customers, regardless of market structure.

 can employ the strategy most easily with suppliers, regardless of market structure.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 96. Award: 1.00 point
 

A financial subsidiary used for centralizing exposure management functions is also referred to as a(an)

 invoice center

 reinvoice center

 affiliate

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 97. Award: 1.00 point  

In evaluating the pros and cons of corporate risk management, one argument against hedging is

 if the corporate guys were good at forecasting exchange rates, they would make more money on Wall Street, so only incompetent
managers are left at corporations to hedge.

 shareholders who are diversified have already managed their exchange rate risk.

 the hedging costs go into someone else's pocket.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 98. Award: 1.00 point  

If a firm faces progressive tax rates,

 they should spread income out across time and subsidiaries.

 they should focus on maximizing income in one division or subsidiary.

 they should manage their income recognition without regard to their taxes.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 99. Award: 1.00 point
 

In evaluating the pros and cons of corporate risk management, "market imperfections" refer to

 information asymmetry, differential transaction costs, default costs, and progressive corporate taxes.

 leading and lagging, receivables and payables, and diversification costs.

 economic costs, noneconomic costs, arbitrage costs, and hedging costs.

 management costs, corporate costs, liquidity costs, and trading costs.

References

Multiple Choice Difficulty: 1 Easy

  
 100. Award: 1.00 point
 

ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10 million if the dollar appreciates. Assume that the
dollar has an equal chance of appreciating or depreciating. Calculate the expected tax of ABC if it is operating in a foreign country that has
progressive corporate taxes as shown. Corporate income tax rate = 15% for the first $7,500,000. Corporate income tax rate = 30% for earnings
exceeding $7,500,000.

 $3,375,000

 $6,000,000

 $1,500,000

 $4,500,000

0.5 [(0.15)( $7,500,000) + (0.30)($20,000,000 − $7,500,000)] + 0.5 [(0.15)($7,500,000) + (0.30)($10,000,000 − $7,500,000)] = $3,375,000.

References

Multiple Choice Difficulty: 2 Medium

 
 101. Award: 1.00 point  

ABC Inc., an exporting firm, expects to earn $20 million if the dollar depreciates, but only $10 million if the dollar appreciates. Assume that the
dollar has an equal chance of appreciating or depreciating. Step one: calculate the expected tax of ABC if it is operating in a foreign country that
has progressive corporate taxes as shown.

Corporate income tax rate = 15% for the first $7,500,000.

Corporate income tax rate = 30% for earnings exceeding $7,500,000.

Step two: ABC is considering implementing a hedging program that will eliminate their exchange rate risk: they will make a certain $15 million
whether or not the dollar appreciates or depreciates. How much will they save in taxes if they implement the program?

 $0

 $3,375,000

 $1,500,000

 $4,500,000

First, determine the tax if ABC Inc. doesn’t implement the hedging program: 0.5 [(0.15)( $7,500,000) + (0.30)($20,000,000 − $7,500,000)] + 0.5
[(0.15)($7,500,000) + (0.30)($10,000,000 − $7,500,000)] = $3,375,000. Now, determine the tax if BAC Inc. does implement the hedging program:
($7,500,000) (0.15) + ($15,000,000 − $7,500,000)(.30) = $3,375,000. There is $0 difference between the two strategies.

References

Multiple Choice Difficulty: 2 Medium

  
 102. Award: 1.00 point
 

A study of Fortune 500 firms hedging practices shows that

 over 90 percent of Fortune 500 firms use forward contracts.

 over 90 percent of Fortune 500 firms use options contracts.

 over 90 percent of Fortune 500 firms use both forward and options contracts.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 103. Award: 1.00 point  

If default costs are significant,

 corporate hedging would be justifiable because it will reduce the probability of default.

 corporate hedging would be unjustifiable because it will increase the probability of default.

 corporate hedging would be unjustifiable because it will increase the probability of default, resulting in a decreased credit rating and
higher financing costs.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 104. Award: 1.00 point
 

With respect to information asymmetry,

 management knows about the firm’s exposure position much better than stockholders, and therefore should be the ones to manage
exchange exposure.

 stockholders know about the firm’s exposure position much better than management, and therefore should be the ones to manage
exchange exposure.

 regulators know about the firm’s exposure position much better than management, and therefore should be the ones to oversee
exchange exposure.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 105. Award: 1.00 point
 

Which of the following call and put option statement is not correct?

 A currency call option gives the holder the right, but not the obligation, to buy a certain amount of foreign currency at a specific
exchange rate up to or at the maturity date.

 A currency put option gives the holder the right, but not the obligation, to sell a certain amount of foreign currency at a specific
exchange rate again up to or at the maturity date.

 The price of call or put options that option buyers have to pay is called premium.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 106. Award: 1.00 point
 

Which of the following statements illustrates the discord between the stated internal risk management policies and the actual practices conducted
in a recent study of 101 large non-financial corporations in South Korea (Kim & Chance, 2018)

 53% of companies stated that they engage in internal risk management to control exchange rate risk.

 86% reported in engaging in external risk management.

 38% of companies practice their stated risk management when they state they engage in internal risk management.

 none of the options

References

Multiple Choice Difficulty: 1 Easy