Ch008 Management of Transaction Exposure

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Eun & Resnick 4e
CHAPTER 8 Management of Transaction Exposure

Three Types of Exposure
Forward Market Hedge
Money Market Hedge
Options Market Hedge
Hedging Foreign Currency Payables
Forward Contracts
Money Market Instruments
Currency Options Contracts
Cross-Hedging Minor Currency Exposure
Hedging Contingent Exposure
Hedging Recurrent Exposure with Swap Contracts
Hedging through Invoice Currency
Hedging via Lead and Lag
Exposure Netting
International Finance in Practice: Riding Shifting Waves of Currency Should the Firm Hedge?
International Finance in Practice: To Hedge or Not to Hedge

Three Types of Exposure
1. Transaction exposure is defined as:
a) the sensitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected exchange rate changes b) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate c) the potential that the firm’s consolidated financial statement can be affected by changes in exchange rates d) ex post and ex ante currency exposures

Answer: a)

2. The most direct and popular way of hedging transaction exposure is by: a) exchange-traded futures options
b) currency forward contracts
c) foreign currency warrants
d) borrowing and lending in the domestic and foreign money markets Answer: b)

3. 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 a currency forward contract
c) A short position in foreign currency warrants
d) borrowing (not lending) in the domestic and foreign money markets Answer: b)
4. If you a foreign currency denominated debt, you can hedge with: a) A long position in a currency forward contract
b) A long position in an exchange-traded futures option
c) Buying the foreign currency today and investing it in the foreign county. d) Both a) and c)
Answer: d)

5. The sensitivity of “realized” domestic currency values of the firm’s contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is: a) Transaction exposure

b) Translation exposure
c) Economic exposure
d) None of the above
Answer: a)

6. The sensitivity of the firm’s consolidated financial statements to unexpected changes in the exchange rate is: a) Transaction exposure
b) Translation exposure
c) Economic exposure
d) None of the above
Answer: b)

7. The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is: a) Transaction exposure
b) Translation exposure
c) Economic exposure
d) None of the above
Answer: c)

8. With any hedge
a) Your losses on one side should about equal your gains on the other side. b) You should try to make money on both sides of the transaction: that way you make money coming and going. c) You should spend at least as much time working the hedge as working the underlying deal itself. d) You should agree to anything your banker puts in front of your face. Answer: a)

Forward Market Hedge

9. Suppose that Boeing Corporation exported a Boeing 747 to British Airways 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 U.K. one-year interest rate: |9.00% per annum | |The spot exchange rate: |$1.50/£ | |The one-year forward exchange rate |$1.46/£ |

Assume...
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