International Financial Management 13th Edition By Jeff Madura – Test Bank

1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:
a. positive.

b. negative.

c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

ANSWER: d
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: INFM.MADU.15.11.02
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.10
KEYWORDS: Bloom’s: Comprehension

2. Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:
a. positive.

b. negative.

c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
d. zero.

ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: INFM.MADU.15.11.02
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.02
KEYWORDS: Bloom’s: Comprehension

3. Assume the following information:
U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
Swiss deposit rate for 1 year = 8%
Swiss borrowing rate for 1 year = 10%
Swiss forward rate for 1 year = $.40
Swiss franc spot rate = $.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge?

a. $234,000

b. $238,584

c. $240,000

d. $236,127

ANSWER: c
RATIONALE: SF600,000  $.40 = $240,000

POINTS: 1
DIFFICULTY: Challenging
LEARNING OBJECTIVES: INFM.MADU.15.11.02
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.10
KEYWORDS: Bloom’s: Application

4. An example of cross-hedging is:
a. find two currencies that are highly positively correlated; match the payables in one currency to the receivables in the other currency.
b. use the forward market to sell forward whatever currencies you will receive.

c. use the forward market to buy forward whatever currencies you will receive.

d. B and C

ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: INFM.MADU.15.11.05
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.10
KEYWORDS: Bloom’s: Knowledge

5. Which of the following reflects a hedge of net payables in British pounds by a U.S. firm?
a. Purchase a currency put option in British pounds.

b. Sell pounds forward.

c. Sell a currency call option in British pounds.

d. Borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.
e. A and B

ANSWER: d
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: INFM.MADU.15.11.02
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.02
KEYWORDS: Bloom’s: Knowledge

6. If Salerno Inc. desires to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wants to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:
a. a money market hedge.

b. a forward sale of yen.

c. purchasing yen call options.
d. purchasing yen put options.
e. selling yen put options.

ANSWER: d
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: INFM.MADU.15.11.03
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.10
KEYWORDS: Bloom’s: Application

7. The real cost of hedging payables with a forward contract equals:
a. the dollar cost of hedging minus the dollar cost of not hedging.

b. the dollar cost of not hedging minus the dollar cost of hedging.

c. the dollar cost of hedging divided by the dollar cost of not hedging.
d. the dollar cost of not hedging divided by the dollar cost of hedging.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: INFM.MADU.15.11.02
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.10
KEYWORDS: Bloom’s: Knowledge

8. >From the perspective of Detroit Co., which has payables in Mexican pesos, hedging the payables is especially beneficial if the expected real cost of hedging the payables is:
a. negative.

b. zero.

c. positive and large.

d. positive and small.
ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: INFM.MADU.15.11.03
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.10
KEYWORDS: Bloom’s: Application

9. Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.
a. can; can

b. can; cannot

c. cannot; can

d. cannot; cannot
ANSWER: b
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: INFM.MADU.15.11.02
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.02
KEYWORDS: Bloom’s: Comprehension

10. 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. purchase euro currency put options.
c. purchase euro currency call options.
d. purchase euros forward.

e. remain unhedged.

ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: INFM.MADU.15.11.03
NATIONAL STANDARDS: United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS: United States – OH – DISC.INFM.MADU.15.10
KEYWORDS: Bloom’s: Application