1. With respect to production management of exchange risk, ________ and plant location are the principal variables that companies may change to manage the risk.
product innovation
product retirement
market selection
product sourcing
2. Jet engine manufacturing entails enormous economies of scale. Pratt & Whitney, a large U.S. jet engine producer, faces substantial competition from Rolls Royce, the British engine manufacturer. What would be the best way for P & W to cope with a dollar that has recently appreciated by 50%?
accelerate R&D spending and cost cutting efforts
shift some of its production abroad
raise the foreign currency prices of its engines sold abroad
buy dollars forward
3. Suppose that the spot rate and the 90 day forward rate on the pound sterling are $1.35 and $1.30, respectively. Your company, wishing to avoid foreign exchange risk, sells £500,000 forward 90 days. Assuming that the spot rate remains the same 90 days hence, your company would
receive £500,000 90 days hence
receive more than £500,000 in 90 days
have been better off not to have sold pounds forward
receive nothing
4. The following information is to be used in answering the next question.
Suppose Alcoa has a payable of SF 1 million due in one year. Alcoa's cost of the payable using a money market hedge is ______ and its cost using a forward market hedge is _______.
$173,900; $177,470
$174,925; $176,300
$176,671; $172,900
$178,937; $174,700