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Question;10.3 Trident's Transaction Exposure;1) A U.S. firm;sells merchandise today to a British company for ?100,000. The current exchange rate is $2.03/?, the;account is payable in three months, and the firm chooses to avoid any hedging;techniques designed to reduce or eliminate the risk of changes in the exchange;rate. The U.S. firm is at risk today of a loss if;A) the exchange;rate changes to $2.00/?.;B) the exchange;rate changes to $2.05/?.;C) the exchange;rate doesn't change.;D) all of the;above.;2) A U.S. firm;sells merchandise today to a British company for ?100,000. The current exchange rate is $2.03/?, the;account is payable in three months, and the firm chooses to avoid any hedging;techniques designed to reduce or eliminate the risk of changes in the exchange;rate. If the exchange rate changes to $2.05/? the U.S. firm will realize a;of ________.;A) loss, $2000;B) gain, $2000;C) loss, ?2000;D) gain, ?2000;3) A U.S. firm;sells merchandise today to a British company for ?100,000. The current exchange rate is $2.03/?, the;account is payable in three months, and the firm chooses to avoid any hedging;techniques designed to reduce or eliminate the risk of changes in the exchange;rate. If the exchange rate changes to $2.01/? the U.S. firm will realize a;of ________.;A) loss, $2,000;B) gain, $2,000;C) loss, ?2000;D) gain, ?2000;4) ________ is;NOT a popular contractual hedge against foreign exchange transaction exposure.;A) Forward market;hedge;B) Money market;hedge;C) Options market;hedge;D) All of the;above are contractual hedges.;Instruction 10.1;Use the;information for the following problem(s).;Plains States Manufacturing has just signed a contract to;sell agricultural equipment to Boschin, a;German firm, for euro 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 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 $1.40/euro;? The six month forward rate is $1.38/euro;? Plains States' cost of capital is 11%;? The Euro zone 6-month borrowing rate is;9% (or 4.5% for 6 months);? The Euro zone 6-month lending rate is 7%;(or 3.5% for 6 months);? The U.S. 6-month borrowing rate is 8% (or;4% for 6 months);? The U.S. 6-month lending rate is 6% (or;3% for 6 months);? December put options for euro 625,000;strike price $1.42, premium price is 1.5%;? Plains States' forecast for 6-month spot;rates is $1.43/euro;? The budget rate, or the lowest acceptable;sales price for this project, is $1,075,000 or $1.35/euro;5) Refer to;Instruction 10.1. If Plains States chooses not to hedge their euro receivable;the amount they receive in six months will be ________.;A) $1,750,000;B) $1,250,000;C) $892,857;D) undeterminable;today;6) Refer to;Instruction 10.1. If Plains States chooses to hedge its transaction exposure in;the forward market, it will ________ euro 1,250,000 forward at a rate of;A) sell, $1.38/euro;B) sell;$1.40/euro;C) buy;$1.38/euro;D) buy;$1.40/euro;7) Refer to;Instruction 10.1. Plains States chooses to hedge its transaction exposure in;the forward market at the available forward rate. The payoff in 6 months will;be ________.;A) $1,750,000;B) $1,250,000;C) $1,725,000;D) $1,787,500;8) Refer to;Instruction 10.1. If Plains States locks in the forward hedge at $1.38/euro;and the spot rate when the transaction was recorded on the books was;$1.40/euro, this will result in a "foreign exchange loss" accounting;transaction of ________.;A) $0;B) $25,000;C) This was not a;loss, it was a gain of $25,000.;D) There is not;enough information to answer this question.;9) Refer to;Instruction 10.1. 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.;A) better off;$43,750;B) better off;$62,500;C) worse off;$43,750;D) worse off;$62,500;10) Refer to;Instruction 10.1. 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?;A) $1,250,000;B) $1,724,880;C) $1,674,641;D) $1,207,371;11) Refer to;Instruction 10.1. Money market hedges almost always return more than forward;hedges because of the greater risk involved.;12) Refer to;Instruction 10.1. If Plains States chooses to implement a money market hedge for;the Euro receivables, how much money will the firm borrow today?;A) euro 1,201,923;B) $1,201,923;C) euro 1,196,172;D) $1,196,172;13) Refer to;Instruction 10.1. A ________ hedge allows Plains States to enjoy the benefits;of a favorable change in exchange rates for their euro receivables contract;while protecting the firm from unfavorable exchange rate changes.;A) forward;B) call option;C) put option;D) money market;14) Refer to;Instruction 10.1. What is the cost of a put option hedge for Plains States;euro receivable contract? (Note: Calculate the cost in future value dollars and;assume the firm's cost of capital as the appropriate interest rate for;calculating future values.);A) $27,694;B) $26,250;C) euro 27,694;D) euro 26,250;15) Refer to;Instruction 10.1. The cost of a call option to Plains States would be ________.;A) $17,653;B) $16,733;C) $18,471;D) There is not;enough information to answer this question.;16) Refer to;Instruction 10.1. If Plains States purchases the put option, and the option expires;in six months on the same day that Plains States receives the euro 1,250,000;the firm will exercise the put at that time if the spot rate is $1.43/euro.;17) The structure;of a money market hedge is similar to a forward hedge. The difference is the;cost of the money market hedge is determined by the differential interest;rates, while the forward hedge is a function of the forward rates quotation.;18) In efficient;markets, interest rate parity should assure that the costs of a forward hedge;and money market hedge should be approximately the same.

 

Paper#51241 | Written in 18-Jul-2015

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