IBF301 | Que Anh Nguyen

Chapter 8_Tutorial Questions

A. Eun Chap 8
1. Explain hedging techniques in slide 20 to hedge a foreign currency payable using the example
of Boeing importing a Rolls-Royce jet engine for £5 million payable in one year (Eun pg. 355)
2. Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Pg. 367
3. Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industry. Pg. 368
4. Consider a U.S.-based company that exports goods to Switzerland. Pg. 369
5. MINICASE: AIRBUS’ DOLLAR EXPOSURE. Pg. 371
B. Additional MCQs
1. If you have a long position in a foreign currency, you can hedge with
A) a short position in an exchange-traded futures option.
B) a short position in foreign currency warrants.
C) a short position in a currency forward contract.
D) borrowing (not lending) in the domestic and foreign money markets.
2. If you owe a foreign currency denominated debt, you can hedge with
A) a long position in a currency forward contract, or buying the foreign currency today and
investing it in the foreign county.
B) buying the foreign currency today and investing it in the foreign county.
C) a long position in a currency forward contract.
D) a long position in exchange-traded futures option.
3. The sensitivity of the firm's consolidated financial statements to unexpected changes in the
exchange rate is
A) transaction exposure. B) economic exposure.C) translation exposure. D) none of the options
4. 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 /€
5. 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).
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(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.
A) (ii) and (iv) B) (ii), (iii), and (iv) C) (i), (ii), and (iii) D) (i) and (iv)
6. 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
A) 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.
B) 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.
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 options
7. 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
A) Go long 16 six-month forward contracts; raise $1,660,000.
B) Go short 16 six-month forward contracts; pay $1,630,000.
C) Go long 12 six-month forward contracts; receive $1,660,000.
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D) Go short 12 six-month forward contracts; pay $1,630,000.

8. 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.
Currency per interest APR
Contract Size Country U.S. $ equiv. U.S. $
£ 10,000 Britain (pound) $ 1.9600 £ 0.5102 i£ = 3 %
12 months forward $ 2.0000 £ 0.5000
€ 10,000 Euro $ 1.5600 € 0.6410 i€ = 2 %
12 months forward $ 1.6000 € 0.6250
SFr. 10,000 Swiss franc $ 0.9200 SFr. 1.0870 iSFr = 4 %
12 months forward $ 1.0000 SFr. 1.0000 i$ = 1 %
9. The following were computed without rounding. Select the answer closest to yours.
A) SFr.1,728,900.26 B) SFr.1,544,705.88 C) SFr.600,000 D) SFr.800,000
10. 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

The following were computed without rounding. Select the answer closest to yours.
A) €1,219,815.78 B) €1,250,000
C) €1,225,490.20 D) €1,244,212.10
11. A Japanese exporter has a €1,000,000 receivable due in one year. Detail a strategy using
options that will eliminate exchange rate risk.
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A) Buy 16 put options on euro, sell 10 call options on yen.

B) Sell 16 call options on euro, buy 10 put options on yen.
C) Buy 16 put options on euro, buy 10 call options on yen.
D) none of the options
12. A Japanese importer has a $1,250,000 payable due in one year.

Detail a strategy using forward contracts that will hedge his exchange rate risk.
A) Go long in 12 yen forward contracts. B) Go short in 16 yen forward contracts.
C) Go long in 2 yen forward contracts. D) none of the options
13. 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
A) $6,545,400. B) $6,880,734. C) $6,450,000. D) $6,653,833.
14. A call option on £1,000 with a strike price of €1,250 is equivalent to
A) 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.
B) a put option on £1,000 with an exercise price of €1,250.
C) a put option on €1,250 with an exercise price of €1,000.
D) 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
15. A put option to sell $18,000 at a strike price of $1.80 = £1.00 is equivalent to
A) a call option on $18,000 at a strike price of $1.80 = £1.00.
B) put option on £10,000 at a strike price of $1.80 = £1.00.
C) call option to buy £10,000 at a strike price of $1.80 = £1.00.
D) none of the options
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16. 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,
A) 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.
B) buy 8 put options on the pound with a strike in euro.
C) sell 10 call options on the euro with a strike in pounds sterling.
D) buy 10 call options on the euro with a strike in pounds sterling.
17. 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,
A) buy 10 put options on the pound with a strike in dollars.
B) sell 10 call options on the euro with a strike in dollars.
C) sell 8 put options on the pound with a strike in dollars.
D) buy 10 call options on the euro with a strike in dollars.
19. A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with
A) forward contracts on the yen. B) forward contracts on the euro.
C) forward contracts on the ruble. D) forward contracts on the pound.
20. 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.
A) The seller has given the buyer an at-the-money call option.
B) The seller has given the buyer both an at-the-money put option, as well as an at-the-money call
option.
C) The seller has given the buyer an at-the-money put option.
D) none of the options
21. 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.
A) The seller has given the buyer an at-the-money call option.
B) The seller has given the buyer both an at-the-money put option, as well as an at-the-money call
option.
C) The seller has given the buyer an at-the-money put option.
D) none of the options
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22. An exporter faced with exposure to an appreciating currency can reduce transaction exposure
with a strategy of
A) paying early, collecting late. B) paying or collecting late.
C) paying late, collecting early. D) paying or collecting early.
23. 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.
A) $6,000,000 B) $1,500,000 C) $3,375,000 D) $4,500,000