Ch008-Management-of-Transaction-Exposure

Eun/Resnick4e90Eun&Resnick4eCHAPTER8ManagementofTransactionExposureThreeTypesofExposureForwardMarketHedgeMoneyMarketHedgeOptionsMarketHedgeHedgingForeignCurrencyPayablesForwardContractsMoneyMarketInstrumentsCurrencyOptionsContractsCross-HedgingMinorCurrencyExposureHedgingContingentExposureHedgingRecurrentExposurewithSwapContractsHedgingthroughInvoiceCurrencyHedgingviaLeadandLagExposureNettingInternationalFinanceinPractice:RidingShiftingWavesofCurrencyShouldtheFirmHedge?InternationalFinanceinPractice:ToHedgeorNottoHedgeThreeTypesofExposure1Transactionexposureisdefinedas:a)thesensitivityofrealizeddomesticcurrencyvaluesofthefirm’scontractualcashflowsdenominatedinforeigncurrenciestounexpectedexchangeratechangesb)theextenttowhichthevalueofthefirmwouldbeaffectedbyunanticipatedchangesinexchangeratec)thepotentialthatthefirm’sconsolidatedfinancialstatementcanbeaffectedbychangesinexchangeratesd)expostandexantecurrencyexposuresAnswer:a)2Themostdirectandpopularwayofhedgingtransactionexposureisby:a)exchange-tradedfuturesoptionsb)currencyforwardcontractsc)foreigncurrencywarrantsd)borrowingandlendinginthedomesticandforeignmoneymarketsAnswer:b)3Ifyouhavealongpositioninaforeigncurrency,youcanhedgewith:a)Ashortpositioninanexchange-tradedfuturesoptionb)Ashortpositioninacurrencyforwardcontractc)Ashortpositioninforeigncurrencywarrantsd)borrowing(notlending)inthedomesticandforeignmoneymarketsAnswer:b)Eun/Resnick4e914Ifyouaforeigncurrencydenominateddebt,youcanhedgewith:a)Alongpositioninacurrencyforwardcontractb)Alongpositioninanexchange-tradedfuturesoptionc)Buyingtheforeigncurrencytodayandinvestingitintheforeigncounty.d)Botha)andc)Answer:d)5Thesensitivityof“realized”domesticcurrencyvaluesofthefirm’scontractualcashflowsdenominatedinforeigncurrencytounexpectedchangesintheexchangerateis:a)Transactionexposureb)Translationexposurec)Economicexposured)NoneoftheaboveAnswer:a)6Thesensitivityofthefirm’sconsolidatedfinancialstatementstounexpectedchangesintheexchangerateis:a)Transactionexposureb)Translationexposurec)Economicexposured)NoneoftheaboveAnswer:b)7Theextenttowhichthevalueofthefirmwouldbeaffectedbyunexpectedchangesintheexchangerateis:a)Transactionexposureb)Translationexposurec)Economicexposured)NoneoftheaboveAnswer:c)8Withanyhedgea)Yourlossesononesideshouldaboutequalyourgainsontheotherside.b)Youshouldtrytomakemoneyonbothsidesofthetransaction:thatwayyoumakemoneycomingandgoing.c)Youshouldspendatleastasmuchtimeworkingthehedgeasworkingtheunderlyingdealitself.d)Youshouldagreetoanythingyourbankerputsinfrontofyourface.Answer:a)Eun/Resnick4e92ForwardMarketHedge9SupposethatBoeingCorporationexportedaBoeing747toBritishAirwaysandbilled£10millionpayableinoneyear.Themoneymarketinterestratesandforeignexchangeratesaregivenasfollows:TheU.S.one-yearinterestrate:6.10%perannumTheU.K.one-yearinterestrate:9.00%perannumThespotexchangerate:$1.50/£Theone-yearforwardexchangerate$1.46/£AssumethatBoeingsellsacurrencyforwardcontractof£10millionfordeliveryinoneyear,inexchangeforapredeterminedamountofU.S.dollar.Whichofthefollowingis(orare)true?OnthematuritydateofthecontractBoeingwill:(i)havetodeliver£10milliontothebank(thecounterpartyofthecontract)(ii)takedeliveryof$14.6million(iii)haveazeronetpoundexposure(iv)haveaprofit,oraloss,dependingonthefuturechangesintheexchangerate,fromthisBritishsalea)(i)and(iv)b)(ii)and(iv)c)(ii),(iii),and(iv)d)(i),(ii),and(iii)Answer:d)10SupposethatBoeingCorporationexportedaBoeing747toBritishAirwaysandbilled£10millionpayableinoneyear.Themoneymarketinterestratesandforeignexchangeratesaregivenasfollows:TheU.S.one-yearinterestrate:6.10%perannumTheU.K.one-yearinterestrate:9.00%perannumThespotexchangerate:$1.50/£Theone-yearforwardexchangerate$1.46/£AssumethatBoeingsellsacurrencyforwardcontractof£10millionfordeliveryinoneyear,inexchangeforapredeterminedamountofU.S.dollar.Supposethatonthematuritydateoftheforwardcontract,thespotrateturnsouttobe$1.40/£(i.e.lessthantheforwardrateof$1.46/£).Whichofthefollowingistrue?a)Boeingwouldhavereceived$14.0million,ratherthan$14.6million,haditnotenteredintotheforwardcontractb)Boeinggained$0.6millionfromforwardhedgingc)a)andb)d)noneoftheaboveAnswer:c)Eun/Resnick4e9311Usethefollowingtableforexchangeratedata.YourfirmisaU.K.-basedexporterofBritishbicycles.YouhavesoldanordertoanItalianfirmfor€1.000.000worthofbicycles.PaymentfromtheItalianfirm(in€)isdueintwelvemonths.Yourfirmwantstohedgethereceivableintopounds.Notdollars.CountryU.S.$equiv.CurrencyperU.S.$TuesdayMondayTuesdayMondayBritain(Pound)£62,5001.60001.61000.6250.62111MonthForward1.61001.63000.62110.61733MonthsForward1.63001.66000.61730.60246MonthsForward1.66001.72000.60240.581412MonthsForward1.72001.80000.58140.5556Euro€62,5001.20001.20000.8333330.8333331MonthForward1.21001.21000.826450.826453MonthsForward1.23001.23000.8130080.8130086MonthsForward1.26001.26000.7936510.79365112MonthsForward1.29001.32000.7751940.7575758Detailastrategyusingforwardcontractsthatwillhedgeyourexchangeraterisk.Haveanestimateofhowmanycontractsofwhattype.a)Borrow€970,873.79inoneyear