# Chapter 11 - Managing Transaction Exposure

```Chapter 11
Managing Transaction Exposure
1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the
spot rate 90 days from now, then the real cost of hedging payables will be:
A) positive.
B) negative.
C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a
discount.
D) zero.
2. Assume zero transaction costs. If the 180-day forward rate is an accurate estimate of the spot rate
180 days from now, then the real cost of hedging receivables will be:
A) positive.
B) negative.
C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a
discount.
D) zero.
3. Assume the following information:
U.S. deposit rate for 1 year
U.S. borrowing rate for 1 year
Swiss deposit rate for 1 year
Swiss borrowing rate for 1 year
Swiss forward rate for 1 year
Swiss franc spot rate
=
=
=
=
=
=
11%
12%
8%
10%
\$.40
\$.39
Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to
Using the information above, what will be the approximate value of these exports in 1 year in
U.S. dollars given that the firm executes a forward hedge?
A) \$234,000.
B) \$238,584.
C) \$240,000.
D) \$236,127.
SOLUTION: SF600,000 &times; \$.40 = \$240,000
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4. Assume the following information:
U.S. deposit rate for 1 year
U.S. borrowing rate for 1 year
New Zealand deposit rate for 1 year
New Zealand borrowing rate for 1 year
New Zealand dollar forward rate for 1 year
New Zealand dollar spot rate
=
=
=
=
=
=
11%
12%
8%
10%
\$.40
\$.39
Also assume that a U.S. exporter denominates its New Zealand exports in NZ\$ and expects to
receive NZ\$600,000 in 1 year. You are a consultant for this firm.
Using the information above, what will be the approximate value of these exports in 1 year in
U.S. dollars given that the firm executes a money market hedge?
A) \$238,584.
B) \$240,000.
C) \$234,000.
D) \$236,127.
SOLUTION:
1. Borrow NZ\$545,455 (NZ\$600,000/1.1) = NZ\$545,455.
2. Convert NZ\$545,455 to \$212,727 (at \$.39 per NZ\$).
3. Invest \$212,727 to accumulate \$236,127 (\$212,727 &times; 1.11) = \$236,127.
5. An example of cross-hedging is:
A) find two currencies that are highly positively correlated; match the payables of the one
currency to the receivables of the other currency.
B) use the forward market to sell forward whatever currencies you will receive.
C) use the forward market to buy forward whatever currencies you will receive.
D) use the forward market to sell forward or buy forward whatever currencies you will receive.
6. Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?
A) purchase a currency put option in British pounds.
B) sell pounds forward.
C) borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
D) purchase a current put option in British pounds OR sell pounds forward
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7. Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?
A) purchase a currency put option in British pounds.
B) sell pounds forward.
C) sell a currency call option in British pounds.
D) borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
E) purchase a currency put option in British pounds OR sell pounds forward
8. If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros but
wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time
payment is to be made, the most appropriate hedge would be:
A) a money market hedge.
C) a forward purchase of euros.
E) selling euro call options.
9. If a Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in
Japanese yen but wanted to be able to capitalize if the yen appreciates substantially against the
dollar by the time payment arrives, the most appropriate hedge would be:
A) a money market hedge.
B) a forward sale of yen.
E) selling yen put options.
10. The real cost of hedging payables with a forward contract equals:
A) the nominal cost of hedging minus the nominal cost of not hedging.
B) the nominal cost of not hedging minus the nominal cost of hedging.
C) the nominal cost of hedging divided by the nominal cost of not hedging.
D) the nominal cost of not hedging divided by the nominal cost of hedging.
11. From the perspective that Detroit Co. has payables in Mexican pesos and receivables in Canadian
dollars, hedging the payables would be most desirable if the expected real cost of hedging
payables is _______, and hedging the receivables would be most desirable if the expected real
cost of hedging receivables is _______.
A) negative; positive
B) zero; positive
C) zero; zero
D) positive; negative
E) negative; negative
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12. Use the following information to calculate the dollar cost of using a money market hedge to hedge
200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the
spot rate of the pound is \$2.02 and the 180-day forward rate is \$2.00. The British interest rate is
5%, and the U.S. interest rate is 4% over the 180-day period.
A) \$391,210.
B) \$396,190.
C) \$388,210.
D) \$384,761.
E) none of these.
SOLUTION:
1. Need to invest &pound;190,476 (&pound;200,000/1.05) = &pound;190,476.
2. Need to exchange \$384,762 to obtain the &pound;190,476 (&pound;190,476 &times; \$2.02) = \$384,762.
3. At the end of 180 days, need \$400,152 to repay loan (\$384,762 &times; 1.04) = \$400,152.
13. Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding
between a forward hedge and a money market hedge, it _______ determine which hedge is
preferable before implementing the hedge. It _______ determine whether either hedge will
outperform an unhedged strategy before implementing the hedge.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
14. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will
depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:
A) sell euros forward.
B) purchase euro currency put options.
C) purchase euro currency call options.
D) purchase euros forward.
E) remain unhedged.
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15. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the
total dollar amount received (after accounting for the option premium) if the firm purchases and
exercises a put option:
Exercise price
Spot rate
Expected spot rate in 30 days
30-day forward rate
A)
B)
C)
D)
E)
=
=
=
=
=
\$.61
\$.02
\$.60
\$.56
\$.62
\$630,000.
\$610,000.
\$600,000.
\$590,000.
\$580,000.
SOLUTION: (\$.61 – \$.02) &times; SF1,000,000 = \$590,000
16. A _______ involves an exchange of currencies between two parties, with a promise to
re-exchange currencies at a specified exchange rate and future date.
A) long-term forward contract
B) currency option contract
C) parallel loan
D) money market hedge
17. If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with a
forward hedge will:
A) have the same result as a call option hedge on payables.
B) have the same result as a put option hedge on payables.
C) have the same result as a money market hedge on payables.
D) require more dollars than a money market hedge.
E) have the same result as a call option hedge on payables AND require more dollars than a
money market hedge.
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18. Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest
rates:
360-day borrowing rate
360-day deposit rate
U.S.
7%
6%
Switzerland
5%
4%
Assume the forward rate of the Swiss franc is \$.50 and the spot rate of the Swiss franc is \$.48. If
Parker Company uses a money market hedge, it will receive _______ in 360 days.
A) \$101,904
B) \$101,923
C) \$98,769
D) \$96,914
E) \$92,307
SOLUTION:
1. Borrow SF190,476 (SF200,000/1.05) = SF190,476.
2. Convert SF190,476 to \$91,428 (SF190,476 &times; \$.48) = \$91,428.
3. Invest \$91,428 at 6% to accumulate \$96,914 (\$91,428 &times; 1.06) = \$96,914.
19. The forward rate of the Swiss franc is \$.50. The spot rate of the Swiss franc is \$.48. The
following interest rates exist:
360-day borrowing rate
360-day deposit rate
U.S.
7%
6%
Switzerland
5%
4%
You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of
dollars you need in 360 days is:
A) \$101,904.
B) \$101,923.
C) \$98,770.
D) \$96,914.
E) \$92,307.
SOLUTION:
1. Need to invest SF192,308 (SF200,000/1.04) = SF192,308.
2. Need to borrow \$92,308 to exchange for SF192,308 (SF192,308 &times; \$.48) = \$92,308.
3. At the end of 360 days, need \$98,769 to repay the loan (\$92,308 &times; 1.07) = \$98,770.
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20. Your company will receive C\$600,000 in 90 days. The 90-day forward rate in the Canadian dollar
is \$.80. If you use a forward hedge, you will:
B) receive \$750,000 in 90 days.
C) pay \$750,000 in 90 days.
E) receive \$480,000 in 90 days.
SOLUTION: C\$600,000 &times; \$0.80 = \$480,000
21. A call option exists on British pounds with an exercise price of \$1.60, a 90-day expiration date,
and a premium of \$.03 per unit. A put option exists on British pounds with an exercise price of
\$1.60, a 90-day expiration date, and a premium of \$.02 per unit. You plan to purchase options to
cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90
days (if at all). You expect the spot rate of the pound to be \$1.57 in 90 days. Determine the
amount of dollars to be received, after deducting payment for the option premium.
A) \$1,169,000.
B) \$1,099,000.
C) \$1,106,000.
D) \$1,143,100.
E) \$1,134,000.
SOLUTION: (\$1.60 – \$.02) &times; &pound;700,000 = \$1,106,000
22. Assume that Smith Corporation will need to purchase 200,000 British pounds in 90 days. A call
option exists on British pounds with an exercise price of \$1.68, a 90-day expiration date, and a
premium of \$.04. A put option exists on British pounds, with an exercise price of \$1.69, a 90-day
expiration date, and a premium of \$.03. Smith Corporation plans to purchase options to cover its
future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the
pound to be \$1.76 in 90 days. Determine the amount of dollars it will pay for the payables,
including the amount paid for the option premium.
A) \$360,000.
B) \$338,000.
C) \$332,000.
D) \$336,000.
E) \$344,000.
SOLUTION: (\$1.68 + \$.04) &times; &pound;200,000 = \$344,000
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23. Assume that Kramer Co. will receive SF800,000 in 90 days. Today’s spot rate of the Swiss franc
is \$.62, and the 90-day forward rate is \$.635. Kramer has developed the following probability
distribution for the spot rate in 90 days:
Possible Spot Rate
in 90 Days
\$.61
\$.63
\$.64
\$.65
Probability
10%
20%
40%
30%
The probability that the forward hedge will result in more dollars received than not hedging is:
A) 10%.
B) 20%.
C) 30%.
D) 50%.
E) 70%.
SOLUTION: The forward hedge will result in more dollars if the spot rate is less than the
forward rate, which is true in the first two cases.
24. Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S\$) in 180 days. Today’s
spot rate of the S\$ is \$.50, and the 180-day forward rate is \$.53. A call option on S\$ exists, with
an exercise price of \$.52, a premium of \$.02, and a 180-day expiration date. A put option on S\$
exists, with an exercise price of \$.51, a premium of \$.02, and a 180-day expiration date. Jones has
developed the following probability distribution for the spot rate in 180 days:
Possible Spot Rate
in 90 Days
\$.48
\$.53
\$.55
Probability
10%
60%
30%
The probability that the forward hedge will result in a higher payment than the options hedge is
_______ (include the amount paid for the premium when estimating the U.S. dollars required for
the options hedge).
A) 0%
B) 10%
C) 30%
D) 40%
E) 70%
SOLUTION: There is a 10% probability that the call option will not be exercised. In that case,
Jones will pay \$.48 &times; S\$100,000 = \$48,000, which is less than the amount paid with the forward
hedge (\$.53 &times; S\$100,000 = \$53,000).
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25. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ\$) in 180 days. Today’s
spot rate of the NZ\$ is \$.50, and the 180-day forward rate is \$.51. A call option on NZ\$ exists,
with an exercise price of \$.52, a premium of \$.02, and a 180-day expiration date. A put option on
NZ\$ exists with an exercise price of \$.51, a premium of \$.02, and a 180-day expiration date.
Patton Co. has developed the following probability distribution for the spot rate in 180 days:
Possible Spot Rate
in 90 Days
\$.48
\$.49
\$.55
Probability
10%
60%
30%
The probability that the forward hedge will result in more U.S. dollars received than the options
hedge is _______ (deduct the amount paid for the premium when estimating the U.S. dollars
A) 10%
B) 30%
C) 40%
D) 70%
E) none of these
SOLUTION: The put option will be exercised in the first two cases, resulting in an amount
received per unit of \$.51 – \$.02 = \$.49. Thus, the forward hedge will result in more U.S. dollars
26. The _______ hedge is not a technique to eliminate transaction exposure discussed in the text.
A) index
B) futures
C) forward
D) money market
E) currency option
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27. Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables.
For the next month, Money has identified its net exposure to the ringgit as being MYR1,500,000.
The 30-day forward rate is \$.23. Furthermore, Money’s financial center has indicated that the
possible values of the Malaysian ringgit at the end of next month are \$.20 and \$.25, with
probabilities of .30 and .70, respectively. Based on this information, what is the expected real cost
of hedging receivables?
A) \$0.
B) –\$7,500.
C) \$7,500.
D) none of these.
SOLUTION:
RCH (1)  ( MYR1,500,000  \$0.20)  ( MYR1,500,000  \$0.23)  \$45,000
RCH (2)  ( MYR1,500,000  \$0.25)  ( MYR1,500,000  \$0.23)  \$30,000
E[ RCH ]  (.30)( 45,000)  (.7)(30,000)  7,500
28. Hanson Corp. frequently uses a forward hedge to hedge its British pound (&pound;) payables. For the
next quarter, Hanson has identified its net exposure to the pound as being &pound;1,000,000. The 90-day
forward rate is \$1.50. Furthermore, Hanson’s financial center has indicated that the possible
values of the British pound at the end of next quarter are \$1.57 and \$1.59, with probabilities of
.50 and .50, respectively. Based on this information, what is the expected real cost of hedging
payables?
A) \$80,000.
B) –\$80,000.
C) \$1,570,000.
D) \$1,580,000.
SOLUTION:
RCH (1)  (&pound;1,000,000  \$1.50)  (&pound;1,000,000  \$1.57)  \$70,000
RCH (2)  (&pound;1,000,000  \$1.50)  (&pound;1,000,000  \$1.59)  \$90,000
E[ RCH ]  (.50)( 70,000)  (.50)( 90,000)  80,000
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The following information refers to questions 29 and 30.
360-day borrowing rate
360-day deposit rate
U.S.
6%
5%
Jordan
5%
4%
29. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of
the dinar is \$1.48, while the 360-day forward rate is \$1.50. How much will Perkins receive in 360
days from implementing a money market hedge (assume any receipts before the date of the
receivable are invested)?
A) \$377,115.
B) \$373,558.
C) \$363,019.
D) \$370,000.
SOLUTION:
1. Borrow JOD238,095.24 (JOD250,000/1.05) = JOD238,095.24.
2. Convert JOD238,095.24 to \$352,380.95 (JOD238,095.24 &times; \$1.48) = \$352,380.95.
3. Invest \$352,380.95 at 5% to accumulate \$370,000 (\$352,280.95 &times; 1.05) = \$370,000.
30. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the
dinar is \$1.48, while the 360-day forward rate is \$1.46. What is Pablo’s cost from implementing a
money market hedge (assume Pablo does not have any excess cash)?
A) \$224,135.
B) \$226,269.
C) \$224,114.
D) \$223,212.
SOLUTION:
1. Need to invest JOD144,230.76 (JOD150,000/1.04) = JOD144,230.76.
2. Need to convert \$213,461.52 to obtain the JOD144,230.76 dinar (JOD144,230.76 &times; \$1.48) =
\$213,461.52.
3. At the end of 360 days, need \$226,269.22 (\$213,461.52 &times; 1.06) = \$226,269.21.
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31. Lorre Company needs 200,000 Canadian dollars (C\$) in 90 days and is trying to determine
whether or not to hedge this position. Lorre has developed the following probability distribution
Possible Value of Canadian Dollar in 90 Days
\$0.54
0.57
0.58
0.59
Probability
15%
25%
35%
25%
The 90-day forward rate of the Canadian dollar is \$.575, and the expected spot rate of the
Canadian dollar in 90 days is \$.55. If Lorre implements a forward hedge, what is the probability
that hedging will be more costly to the firm than not hedging?
A) 40%.
B) 60%.
C) 15%.
D) 85%.
SOLUTION: Since Lorre locks into the \$.575 with a forward contract, the first two cases would
have been cheaper had Lorre not hedged (15% + 25% = 40%).
32. Quasik Corporation will be receiving 300,000 Canadian dollars (C\$) in 90 days. Currently, a 90day call option with an exercise price of \$.75 and a premium of \$.01 is available. Also, a 90-day
put option with an exercise price of \$.73 and a premium of \$.01 is available. Quasik plans to
purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is \$.71,
what is the net amount received from the currency option hedge?
A) \$219,000.
B) \$222,000.
C) \$216,000.
D) \$213,000.
SOLUTION: (\$.73 – \$.01) &times; 300,000 = \$216,000.
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33. FAB Corporation will need 200,000 Canadian dollars (C\$) in 90 days to cover a payable position.
Currently, a 90-day call option with an exercise price of \$.75 and a premium of \$.01 is available.
Also, a 90-day put option with an exercise price of \$.73 and a premium of \$.01 is available. FAB
plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is
\$.71, what is the net amount paid, assuming FAB wishes to minimize its cost?
A) \$140,000.
B) \$148,000.
C) \$152,000.
D) \$150,000.
SOLUTION: (\$.71 – \$.01) &times; 200,000 = \$140,000. Note: the call option is not exercised since the
spot rate is less than the exercise price.
34. You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) future
receivables of 350,000 Australian dollars (A\$) 180 days from now. Put options are available for a
premium of \$.02 per unit and an exercise price of \$.50 per Australian dollar. The forecasted spot
rate of the Australian dollar in 180 days is:
Future Spot Rate
\$.46
\$.48
\$.52
Probability
20%
30%
50%
The 90-day forward rate of the Australian dollar is \$.50.
What is the probability that the put option will be exercised (assuming Arizona purchased it)?
A) 0%.
B) 80%.
C) 50%.
D) none of these.
SOLUTION: Arizona will exercise when the exercise price is greater than the future spot (20% +
30% = 50%).
35. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield
the same result as the _______ hedge.
A) put option
B) forward
C) call option
D) none of these
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36. Which of the following is the least effective way of hedging transaction exposure in the long run?
A) long-term forward contract.
B) currency swap.
C) parallel loan.
D) money market hedge.
37. When a perfect hedge is not available to eliminate transaction exposure, the firm may consider
methods to at least reduce exposure, such as:
B) lagging.
C) cross-hedging.
D) currency diversification.
E) all of these.
38. To hedge a _______ in a foreign currency, a firm may _______ a currency futures contract for
that currency.
A) receivable; purchase
B) payable; sell
C) payable; purchase
D) none of these
39. A forward contract hedge is very similar to a futures contract hedge, except that _______
contracts are commonly used for _______ transactions.
A) forward; small
B) futures; large
C) forward; large
D) none of these
40. Celine Co. will need €500,000 in 90 days to pay for German imports. Today’s 90-day forward
rate of the euro is \$1.07. There is a 40 percent chance that the spot rate of the euro in 90 days will
be \$1.02, and a 60 percent chance that the spot rate of the euro in 90 days will be \$1.09. Based on
this information, the expected value of the real cost of hedging payables is \$_______.
A) –35,000
B) 25,000
C) –1,000
D) 1,000
SOLUTION: E[ RCH p ]  \$35,000  0.40  \$25,000  0.60  \$1,000
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41. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost
of hedging payables will be:
A) highly positive.
B) highly negative.
C) zero.
D) none of these.
42. Samson Inc. needs €1,000,000 in 30 days. Samsong can earn 5 percent annualized on a German
security. The current spot rate for the euro is \$1.00. Samson can borrow funds in the U.S. at an
annualized interest rate of 6 percent. If Samson uses a money market hedge, how much should it
borrow in the U.S.?
A) \$952,381.
B) \$995,851.
C) \$943,396.
D) \$995,025.
SOLUTION: 1,000,000 /[1  (5%  30 / 360)]  \$995,851
43. Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a German security.
The current spot rate for the euro is \$1.00. Blake can borrow funds in the U.S. at an annualized
interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the
cost of implementing the hedge?
A) \$1,000,000.
B) \$1,055,602.
C) \$1,000,830.
D) \$1,045,644.
SOLUTION:
1. Borrow \$995,851 from a U.S. bank (€1,000,000 &times; \$1.00 &times; [1 + (.05 &times; 30/360)]
2. Convert \$995,851 to €995,851, given the exchange rate of \$1.00 per euro.
3. Use the euros to purchase a German security that offers 0.42% interest over 30 days.
4. Repay the U.S. loan in 30 days, plus interest; the amount owed is \$1,000,830 (computed as
\$995,851 &times; [1 + (.06 &times; 30/360)].
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44. If interest rate parity exists, and transaction costs do not exist, the _______ hedge will yield the
same result as the _______ hedge.
A) money market; futures
B) money market; options
C) money market; forward
D) forward; options
45. To hedge a contingent exposure, in which an MNC’s exposure is contingent on a specific event
occurring, the appropriate hedge would be a(n) _______ hedge.
A) money market
B) futures
C) forward
D) options
46. A _______ is not a technique for hedging long-term transaction exposure.
A) long-term forward contact
B) long-term futures contract
C) currency swap
D) parallel loan
47. The _______ does not represent an obligation.
A) long-term forward contract
B) currency swap
C) parallel loan
D) currency option
48. Sometimes the overall performance of an MNC may already be insulated by offsetting effects
between subsidiaries and it may not be necessary to hedge the position of each individual
subsidiary.
A) true.
B) false.
49. If an MNC is hedging various currencies, it should measure the real cost of hedging in each
currency as a dollar amount for comparison purposes.
A) true.
B) false.
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50. Since the results of both a money market hedge and a forward hedge are known beforehand, an
MNC can implement the one that is more feasible.
A) true.
B) false.
51. Hedging the position of individual subsidiaries is generally necessary, even if the overall
performance of the MNC is already insulated by the offsetting positions between subsidiaries.
A) true.
B) false.
52. If an MNC is extremely risk-averse, it may decide to hedge even though its hedging analysis
indicates that remaining unhedged will probably be less costly than hedging.
A) true.
B) false.
53. A money market hedge involves taking a money market position to cover a future payables or
receivables position.
A) true.
B) false.
54. To hedge a payable position with a currency option hedge, an MNC would write a call option.
A) true.
B) false.
55. MNCs generally do not need to hedge because shareholders can hedge their own risk.
A) true.
B) false.
56. Currency futures are very similar to forward contracts, except that they are standardized and are
more appropriate for firms that prefer to hedge in smaller amounts.
A) true.
B) false.
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57. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, an
A) true.
B) false.
58. When the real cost of hedging is positive, this implies that hedging was more favorable than not
hedging.
A) true.
B) false.
59. A futures hedge involves taking a money market position to cover a future payables or receivables
position.
A) true.
B) false.
60. If interest rate parity (IRP) exists, then the money market hedge will yield the same result as the
options hedge.
A) true.
B) false.
61. The price at which a currency put option allows the holder to sell a currency is called the
settlement price.
A) true.
B) false.
62. A put option essentially represents two swaps of currencies, one swap at the inception of the loan
contract and another swap at a specified date in the future.
A) true.
B) false.
63. The hedging of a foreign currency for which no forward contract is available with a highly
correlated currency for which a forward contract is available is referred to as cross-hedging.
A) true.
B) false.
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International Financial Management
64. The exact cost of hedging with call options (as measured in the text) is not known with certainty
at the time that the options are purchased.
A) true.
B) false.
65. The tradeoff when considering alternative call options to hedge a currency position is that an
MNC can obtain a call option with a higher exercise price, but would have to pay a higher
A) true.
B) false.