Problem 1. Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is $.80. If you use a forward hedge, you will-
a. receive $750,000 today.
b. receive $750,000 in 90 days.
c. pay $750,000 in 90 days.
d. receive $480,000 today.
e. receive $480,000 in 90 days
Problem 2. With regard to hedging translation exposure, translation losses ________; and gains on forward contracts used to hedge translation exposure _______.
a. are not tax deductible; are taxed
b. are tax deductible; are taxed
c. are not tax deductible; are not taxed
d. are tax deductible; are not taxed
Problem 3. An example of cross-hedging is:
a. find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of 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.
Problem 4. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the _______ hedge.
a. put option
b. forward
c. call option
d. none of the above
Problem 5. Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is $2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period.
a. $391,210.
b. $396,190.
c. $388,210.
d. $384,761.
e. none of the above.