Management Of Transaction Exposure

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Question 1
Free
Multiple Choice

Transaction exposure is defined as

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A

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

B

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

C

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

D

ex post and ex ante currency exposures.

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Question 2
Free
Multiple Choice

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

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A

exchange-traded futures options.

B

currency forward contracts.

C

foreign currency warrants.

D

borrowing and lending in the domestic and foreign money markets.

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Question 3
Free
Multiple Choice

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

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A

A short position in an exchange-traded futures option

B

A short position in a currency forward contract

C

A short position in foreign currency warrants

D

Borrowing (not lending) in the domestic and foreign money markets

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Question 4
Free
Multiple Choice

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

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A

a long position in a currency forward contract.

B

a long position in an exchange-traded futures option.

C

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

D

both a) and c)

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Question 5
Free
Multiple Choice

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

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A

a long position in a currency forward contract.

B

a long position in an exchange-traded futures option.

C

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

D

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

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Question 6
Multiple Choice

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

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A
transaction exposure.
B
translation exposure.
C
economic exposure.
D
none of the above
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Question 7
Multiple Choice

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

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A
transaction exposure.
B
translation exposure.
C
economic exposure.
D
none of the above
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Question 8
Multiple Choice

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

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A
transaction exposure.
B
translation exposure.
C
economic exposure.
D
none of the above
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Question 9
Multiple Choice

With any hedge

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A
your losses on one side should about equal your gains on the other side.
B
you should try to make money on both sides of the transaction: that way you make money coming and going.
C
you should spend at least as much time working the hedge as working the underlying deal itself.
D
you should agree to anything your banker puts in front of your face.
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Question 10
Multiple Choice

With any successful hedge

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A
you are guaranteed to lose money on one side.
B
you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
C
both a) and b)
D
none of the above
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Question 11
Multiple Choice

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

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A
interest rate parity.
B
option pricing.
C
flexibility and availability.
D
none of the above
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Question 12
Multiple Choice

Since a corporation can hedge exchange rate exposure at low cost

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A
there is no benefit to the shareholders in an efficient market.
B
shareholders would benefit from the risk reduction that hedging offers.
C
the corporation's banker would benefit from the risk reduction that hedging offers.
D
none of the above
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Question 13
Multiple Choice

A CFO should be least worried about

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A
transaction exposure.
B
translation exposure.
C
economic exposure.
D
none of the above
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Question 14
Multiple Choice

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

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A
transaction exposure.
B
translation exposure.
C
economic exposure.
D
none of the above
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Question 15
Multiple Choice

A stock market investor would pay attention to

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A
anticipated changes in exchange rates that have been already discounted and reflected in the firm's value.
B
unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value.
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Question 16
Multiple Choice

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: image 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.dollar.Which of the following is (or are)true? On the maturity date of the contract Boeing will:
(i)have to deliver €10 million to the bank (the counterparty of the forward contract)
(ii)take delivery of $14.6 million
(iii)have a zero net pound exposure
(iv)have a profit,or a loss,depending on the future changes in the exchange rate,from this British sale

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A
(i) and (iv)
B
(ii) and (iv)
C
(ii), (iii), and (iv)
D
(i), (ii), and (iii)
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Question 17
Multiple Choice

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: image 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.dollar.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?

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A
Boeing would have received only $14.0 million, rather than €14.6 million, had it not entered into the forward contract
B
Boeing gained $0.6 million from forward hedging
C
a) and b)
D
none of the above
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Question 18
Multiple Choice

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. image Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type.

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A
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.
B
Sell €1m forward using 16 contracts at $1.20 per €1.Buy £750,000 forward using 12 contracts at $1.60 per £1.
C
Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1.
D
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.
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Question 19
Multiple Choice

A Japanese EXPORTER has a €1,000,000 receivable due in one year.Spot and forward exchange rate data given in the table: image 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 exchange rate risk.

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A
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.
B
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.
C
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.
D
None of the above
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Question 20
Multiple Choice

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?

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A
$1.85 = £1.00
B
$1.8750 = £1.00
C
$1.90 = £1.00
D
none of the above
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