Problem 1 Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a _______ cycle, the firm is _______ affected by its exposure.
A strong dollar; favorably
B weak dollar; not
C strong dollar; not
D weak dollar; favorably
E none of the above.
Problem 2 Suppose the euro is quoted at 0.7064--80 in London. What is the percentage bid ask spread?
A -0.2260%
B -0.2265%
C 0.2265%
D 0.2260%
E none of the above.
Problem 3 Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$1,000,000, while Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars?
A $500,000 outflow.
B $500,000 inflow.
C $275,000 inflow.
D $275,000 outflow
E none of the above.
Problem 4 Assume that ABC Corporation will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90‑day expiration date, and a premium of $.04. A put option exists on British pounds, with an exercise price of $1.69, a 90‑day expiration date, and a premium of $.03. ABC Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium.
A $360,000
B $338,000
C $332,000
D $336,000
E $344,000
Problem 5 XYZ Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. XYZ plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge? 0 percent.
A $219,000
B $222,000
C $216,000
D $213,000
E none of the above
Problem 6 Jones Co. expects to receive 5 million euros tomorrow as a result of selling goods to the Netherlands. Jones estimates the standard deviation of daily percentage changes of the euro to be 1 percent over the last 100 days. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-day loss if the expected percentage change of the euro tomorrow is 0.5%?
A -0.50%
B -2.20%
C -1.50%
D -1.20%
E none of the above
Problem 7 Continuing on with the Jones example above, what is the maximum one-day loss in dollars if the expected percentage change of the euro tomorrow is 0.5%? The current spot rate of the euro (before considering the maximum one-day loss) is $1.01.
A ($75,750)
B ($60,600)
C ($111,100)
D ($25,250)
E none of the above
Problem 8. 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