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Exam 11: Managing Transaction Exposure

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Question 31

Multiple Choice

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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) write euro currency put options.
C) purchase euro currency call options.
D) purchase euros forward.
E) remain unhedged.

F) A) and D)
G) None of the above

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Question 32

Multiple Choice

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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 the above

E) All of the above
F) C) and D)

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Question 33

Multiple Choice

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Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is £0.47. If you use a forward hedge, you will (to the nearest £) :

FAB plc will need $200,000 in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of £0.57 and a premium of £0.01 is available. Also, a 90-day put option with an exercise price of £0.55 and a premium of £0.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is £0.52, what is the net amount paid, assuming FAB wishes to minimize its cost?

A put option exists on dollars with an exercise price of £0.55, a 90-day expiration date, and a premium of £0.02 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 dollar to be £0.54 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.