1. _______ is a technique used by MNEs to deal with currency exposure?
(a) Do nothing
(c ) Hedging
(d) All are techniques MNEs could use.
2. Assuming no transaction costs (i.e., hedging is “free”), hedging currency exposures
should _______ the variability of expected cash flow to a firm and at the same time, the
expected value of the cash flows should_________.
(a ) increase; not change
(b) decrease; not change
(c ) not change; increase
(d ) not change; not change
3. Which of the following is cited as a good reason for NOT hedging currency exposures?
(a) Shareholders are more capable of diversifying risk than management.
(b) Currency risk management through hedging does not increase expected cash flows.
(c) Hedging activities are often of greater benefit to management than to shareholders.
(d ) All of the above are cited as reason NOT to hedge.
4. A U.S. firm sells merchandise to a British company for £ 100,000 at a current exchange
rate of $1.43/£. If the exchange rate changes to $1.45/£ the U.S. firm will realize a ______ of _______.
(a) loss; $2000
(b) gain; $2000
(c) Loss; £2000
(d) gain; £2000
Use the following information for problem 5-13:
Plains States Manufacturing has just signed a contract to sell agriculture equipment to Boschin, a German firm, for € 1,250,000. The sale was made in June with payment due six months later than December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
• The spot exchange rate is $0.8924/€
• The six month forward rate is $0.8750/€
• Plains States’ cost of capital is 11%
• The Euro zone 6-month borrowing rate is 9%( or 4.5% for 6 months)
• The Euro zone 6-months borrowing rate is 7%( or 3.5% for 6 months)
• The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
• The U.S. 6-month lending rate is 6%( or 3% for 6 months)
• December put options for € 625,000; strike price $0.90,premium prices is 1.5%
• Plains States’ forecast for 6-month spot rates is $0.91/€
• The budget rate, or the lowest acceptable sales price for this project, is $1,075,000
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