Chap. 8 & 9 Flashcards
T/f: An option gives the holder the right, but not the obligation, to buy or sell a given quantity of an asset in the future at prices agreed upon today.
True
Exercise of a currency future option results in a ____ future position for the _______ of a call or the writer of a put.
long, holder
Exercise of a currency future option results in a ____ future position for the _______ of a call or the buyer of a put.
short, seller
World major currencies
US dollar, Canadian dollar, Mexican peso, British pound, wuro, Swiss franc, and Japanese yen
_______ ______ involves a position in one asset by taking a position in another asset
Cross- hedging
An efficient and cost-effective mechanism for settling interaffiliate foreign exchange transaction and thus determining the firms’s residual exposure
Multilateral Netting
Three hedging strategies though invoice currency
Shift, Share, Diversify
______ exchange risk by invoicing foreign sale sin home currency
Shift
________ exchange risk by pro-rating the currency of the invoice between foreign and home currencies
Share
__________ exchange risk by using a market based index
Diversify
_____ option give the holder the right, but no the obligation to BUY a given quantity of some asset at some time in the future at prices agreed upon today
Call
______ option give the holder the right, but no the obligation to SELL a given quantity of some asset at some time in the future at prices agreed upon today
Put
A multinational firm should not consider deals in a isolation, but should focus on hedging the firms as _______ __________ ________
Portfolio of currency positions
The sensitivity of realized domestic currency values of the firms contractual cash flow denominated in foreign currencies to unexpected exchange rate changes
Transaction Exposure
The most direct and popular way of hedging transaction exposure is by
Currency forward contracts
The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is
Economic exposure
The choice between a forward market hedge and a money market hedge often comes down to
Interest Rate parity
Buy PUT options on the foreign currency with a strike in the domestic currency is what type of hedging
Foreign currency RECEIVABLE
When you hedge a foreign currency payable
buy Call options on the foreign currency
anything other than the “big six”: U.S. dollar, British pound, Japanese yen, euro, Canadian dollar, and Swiss franc.
Minor Currency
The main thing is to find one asset that covaries with another asset in some predictable way.
Cross Hedging
Contingent exposure can best be hedged with
Oprions
Generally speaking, a firm with recurrent exposure can best hedge using which product?
Swaps
An exporter faced with exposure to an appreciating currency can reduce transaction
exposure with a strategy of
Paying early, collecting late
The link between the home currency value of a firm’s assets and liabilities and exchange
rate fluctuations is
asset exposure.
why a bank may establish a multinational operation?
A. Low marginal and transaction costs
B. Home nation information services, and prestige
C. Growth and risk reduction
The link between a firm’s future operating cash flows and exchange rate fluctuations is
Operation Exposure
U.S. firms that produce domestically and sell only to domestic customers can be affected if
they compete against import
Exchange Rate Change
the extent to which the firm’s operating cash flows will be affected by unexpected changes
in exchange rates.
Operation Exposure
the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.
Economic Exposure
