Topic 5

Question 1

You owe a supplier €10M in 6 months and a client owes you £10M in 6 months. You should

A. Buy euros and buy pounds on the forward market
B. Sell euros and sell pounds on the forward market
C. Sell euros and buy pounds on the forward market
D. Buy euros and sell pounds on the forward market

Answer 1

C. Sell euros and buy pounds on the forward market

Question 2

You own a store in France and owe a British supplier £1M in 3 months. How would you hedge this exposure? How much would it cost?

A. Sell Euros, Buy Pounds. It would cost €1,328,859
B. Sell Euros, Buy Pounds. It would cost €1,980,000
C. Buy Euros, Sell Pounds. It would cost €1,328,859

Answer 2

A. Sell Euros, Buy Pounds. It would cost €1,328,859

Question 3

You owe €1,000,000 in one year. The current spot is $1.2/€ A European bank is paying 2% on deposits or will lend at 5%. A U.S. bank is paying 3% or will lend at 6%.How many euros do you need today?

A. €950,447
B. €980,392
C. €1,176,470
D. €1,247,058

Answer 3

B. €980,392

Question 4

You owe €1,000,000 in one year. The current spot is $1.2/€ A European bank is paying 2% on deposits or will lend at 5%. A U.S. bank is paying 3% or will lend at 6%.How many dollars do you need today?

A. $950,447
B. $980,392
C. $1,176,470
D. $1,247,058

Answer 4

C. $1,176,470

Question 5

You owe €1,000,000 in one year. The current spot is $1.2/€ A European bank is paying 2% on deposits or will lend at 5%. A U.S. bank is paying 3% or will lend at 6%. How many dollars do you need in one year?

A. $950,447
B. $980,392
C. $1,176,470
D. $1,247,058

Answer 5

D. $1,247,058

Question 6

You are owed €1,000,000 in one year. The current spot is $1.2/€ A European bank is paying 2% on deposits or will lend at 5%. A U.S. bank is paying 3% or will lend at 6%. How many euros do you need today?

A. €952,380
B. €991,489
C. €1,142,856
D. €1,177,142

Answer 6

A. €952,380

Question 7

You are owed €1,000,000 in one year. The current spot is $1.2/€ A European bank is paying 2% on deposits or will lend at 5%. A U.S. bank is paying 3% or will lend at 6%. How many dollars do you need today?

A. $952,380
B. $991,489
C. $1,142,856
D. $1,177,142

Answer 7

A. $952,380

Question 8

You are owed €1,000,000 in one year. The current spot is $1.2/€ A European bank is paying 2% on deposits or will lend at 5%. A U.S. bank is paying 3% or will lend at 6%. How many dollars do you get in a year?

A. $952,380
B. $991,489
C. $1,142,856
D. $1,177,142

Answer 8

A. $952,380

Question 9

U.S. Treasury rates are 2% while U.K. rates are 4%. The spot rate is $1.25/£.A U.S. bank is charging 5% for borrowers. A U.K. bank is charging 6% for borrowers. What should the forward rate be?

A. $1.2260/£
B. $1.2745/£
C. $1.2500/£
D. $1.2347/£

Answer 9

A. $1.2260/£

Question 10

U.S. Treasury rates are 2% while U.K. rates are 4%. The spot rate is $1.25/£.A U.S. bank is charging 5% for borrowers. A U.K. bank is charging 6% for borrowers. What is the effective exchange rate with a money market hedge if you were owed £10 million?

A. $1.2260/£
B. $1.2028/£
C. $1.2620/£
D. $1.2347/£

Answer 10

B. $1.2028/£

Question 11

U.S. Treasury rates are 2% while U.K. rates are 4%. The spot rate is $1.25/£.A U.S. bank is charging 5% for borrowers. A U.K. bank is charging 6% for borrowers. What is the effective exchange rate with a money market hedge if you owe£10 million?

A. $1.2260/£
B. $1.2028/£
C. $1.2620/£
D. $1.2347/£

Answer 11

C. $1.2620/£

Question 12

You will receive ¥10 million in one year. You are tasked to execute a money market hedge for this Yen exposure. If the dollar interest rate is 5% and the yen interest rate is 3% and the spot rate is ¥120/$, then the first step would be to

A. Borrow ¥9,708,737
B. Borrow $83,333
C. Borrow ¥9,523,809
D. Borrow $80,906

Answer 12

A. Borrow ¥9,708,737

Question 13

Boeing sells a plane for £10,000,000 deliverable in 1 year, How do we allow upside potential but protect from downside?

A. Sell pound futures
B. Buy pound futures
C. Sell put options
D. Buy put options

Answer 13

B. Buy pound futures

Question 14

You owe someone £10,000,000 deliverable in 1 year. The current spot is $1.20/£. You have calculated that your profitability breakeven price is $12 million. How can you hedge this exposure using options and ensure that you at least breakeven?

A. Sell call options with a strike price = $1.20/£
B. Buy call options with a strike price = $1.20/£
C. Sell put options with a strike price = $1.20/£

Answer 14

B. Buy call options with a strike price = $1.20/£ (?)

Question 15

Someone faced with exposure to a depreciating currency can reduce transaction exposure with a strategy of 
A. paying or collecting early
B. paying or collecting late
C. paying late, collecting early
D. paying early, collecting late

Answer 15

B. paying or collecting late

Question 16

Spot price = $1.20, if the premium = $.1086 for a put with a strike price = $1.25, what is the intrinsic value? Time value?

A. $.05; $.05
B. $.1086; $0
C. $0; $.1086
D. $.05; $.1086
E. $.05; $.0586

Answer 16

E. $.05; $.0586

Question 17

You buy a put option on £10 million with a strike price = $1.18 and a premium = $.07. If the spot price ends up equal to $1.15, how much do you end up with?

A. $10,000,000
B. $12,000,000
C. $11,800,000
D. $11,500,000
E. $11,100,000

Answer 17

E. $11,100,000

Question 18

You buy a put option on £10 million with a strike price = $1.18 and a premium = $.07. If the spot price ends up equal to $1.20, how much do you end up with?

A. $10,000,000
B. $12,000,000
C. $11,800,000
D. $11,300,000
E. $11,100,000

Answer 18

D. $11,300,000

Question 19

85You buy a put option on £10 million with a strike price = $1.18 and a premium = $.07. What is the least you can end up with?

A. $10,000,000
B. $12,000,000
C. $11,800,000
D. $11,300,000
E. $11,100,000

Answer 19

E. $11,100,000

Question 20

You are owed £10 million in one year. You enter into a Forward Participation Contract to hedge your Pound exposure with a guaranteed rate of $1.35/£ and a participation rate of 20%. If the spot price ends up at $1.45/£ in one year, you will receive _______. If the spot price ends up at $1.20/£ in one year, you will receive ______

A. $1.36 & $1.37 per Pound
B. $1.35 & $1.45 per Pound
C. $1.37 & $1.40 per Pound
D. $1.37 & $1.35 per Pound
E. None of the above

Answer 20

D. $1.37 & $1.35 per Pound

Question 21

The current spot rate is $2/£ and the price you charge domestic customers is $10 million. How would you “share” the FX risk with your British customer if you decided to use two currencies on your invoices? How much will your customer pay if the spot rate ends up at $1.5/£?

A. Bill them for $10 million and £5 million. They will pay £10 million
B. Bill them for $5 million and £2.5 million. They will pay £7.5 million
C. Bill them for $5 million and £7.5 million. They will pay £5.83 million
D. Bill them for $5 million and £2.5 million. They will pay £5.83 million

Answer 21

C. Bill them for $5 million and £7.5 million. They will pay £5.83 million

Question 22

8-98The current spot rate is $2/£ and the price you charge domestic customers is $10 million. How would you “share” the FX risk with your British customer if you decided to use two currencies on your invoices? How much will you receive if the spot rate ends up at $1.5/£?

A. Bill them for $10 million and £5 million. You receive $15.5 million
B. Bill them for $5 million and £2.5 million. You receive $8.75 million
C.Bill them for $5 million and £7.5 million. You receive $12.5 million

Answer 22

B. Bill them for $5 million and £2.5 million. You receive $8.75 million

Question 23

The spot rate is $1.1/€ and interest rates are $2% and €3% What should the 1-year forward rate equal?

A. $1.10/€
B. $1.08/€
C. $1.0893/€
D. $1.0984/€
E. $1.1108/€

Answer 23

C. $1.0893/€

Question 24

You owe €10 million. The spot is $1.1/€ and over last year, ranged from $1.05 - $1.15. You assume that this is a reasonable range for the next year. In this case, you are worried that the euro will ____

A. Depreciate to $1.05
B. Appreciate to $1.15
C. Stay unchanged

Answer 24

A. Depreciate to $1.05

Question 25

You owe €10 million. How can you hedge this euro transaction?

A. Buy euro calls
B. Buy euro puts
C. Buy euro futures
D. Sell euro futures
E. Both A and C
F. Both B and D

Answer 25

E. Both A and C

Question 26

When exchange rates change,

A. this can alter the operating cash flow of a domestic firm
B. this can alter the competitive position of a domestic firm
C.this can alter the home currency values of a multinational firm’s assets and liabilities.

Answer 26

C.this can alter the home currency values of a multinational firm’s assets and liabilities.

Question 27

There are two possible states of the world, $1/€ or $1.25/€. In the first state, your asset will be worth €1,000. In the second state, your asset will be worth €800. There is ___ between euro asset prices and the exchange rate

A. A positive correlation
B. A negative correlation
C. No correlation

Answer 27

B. A negative correlation

Question 28

There are two possible states of the world, $1/€ or $1.25/€. In the first state, your asset will be worth €1,000. In the second state, your asset will be worth €800. There is _____ FX risk.

A. A lot of
B. No
C. An indeterminate amount of

Answer 28

B. No

Question 29

There are two possible states of the world, $1/€ or $1.25/€. In the first state, your asset will be worth €1,000. In the second state, your asset will be worth €900. There is ___ FX risk.

A. A lot of
B. No
C. An indeterminate amount of

Answer 29

A. A lot of

Question 30

If Var(S) = .03125 and Cov(P,S) = 7.8125, what is the exposure coefficient? How would you hedge this exposure?

A. β = -250; sell €250 forward
B. β = -250; buy €250 forward
C. β = 250; sell €250 forward
D. β = 250; buy €250 forward

Answer 30

B. β = -250; buy €250 forward

Question 31

There are two possible states of the world, $1/€ or $1.25/€. In the first state, your asset will be worth €1,000. In the second state, your asset will be worth €900. Assume F = $1.10/€, what are the hedged positions in the two possible states?

A. $1,025; $1,125
B. $1,000; $1,125
C. $1,025; $1,087
D. $975; $1,163
E. $1,062; $1,062

Answer 31

C. $1,025; $1,087

Question 32

A firm with a highly elastic demand for its products

A. will be unable to pass increased costs following unfavorable changes in the exchange rate without significantly lowering the quantity sold
B. will be able to raise prices following unfavorable changes in the exchange rate without significantly lowering the quantity sold
C. can easily pass increased costs on to consumers
D. will sell about the same amount of product regardless

Answer 32

A. will be unable to pass increased costs following unfavorable changes in the exchange rate without significantly lowering the quantity sold