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Self-Assessment Quiz

This activity contains 10 questions.

Question 1.
Losses from __________ exposure generally reduce taxable income in the year they are realized. ___________ exposure losses may reduce taxes over a series of years.

End of Question 1

Question 2.

Your firm chooses NOT to hedge its currency exposure. Compared to a hedging opportunity where there are no transaction costs (i.e., hedging is "free"), failure to hedge currency exposures should __________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should _________ relative to a hedged position.
End of Question 2

Question 3.
A U.S. firm sells merchandise to a German company for €150,000. If the current exchange rate is $1.30.€£ and the U.S. firm chooses not to hedge, then the U.S. firm is at risk of a loss if

End of Question 3

Question 4.
A U.S. firm sells merchandise to a German company for €150,000 at a current exchange rate of $1.30/€. If the exchange rate changes to $1.32/€ the U.S. firm will realize a ________ of ________.

End of Question 4

Question 5.
In efficient markets, interest rate parity should assure that the cost of a forward hedge will be less than the cost of the money market hedge.

End of Question 5

Question 6.
Hedging accounts payable foreign currency exchange risk would likely consider the purchase of a _______ option on the foreign currency whereas hedging accounts receivable currency exchange risk would be likely to purchase a __________ option on the foreign currency.

End of Question 6

Question 7.
According to a survey by Bank of America, when firms do hedge, the most common types of hedging instruments are ______________.

End of Question 7

Question 8.

Use the following information for problems 8 - 10 SureDrip Irrigation Systems has just signed a contract to sell irrigation equipment to Hosehin, an Austrian firm, for €1,500,000. The sale was made in March with payment due six months later in September. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, SureDrip is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.

  • The spot exchange rate is $1.3000/€
  • The six month forward rate is $1.2800/€
  • SureDrip's cost of capital is 12%
  • The Euro zone 6-month borrowing rate is 8% (or 4.0% for 6 months)
  • The Euro zone 6-month lending rate is 6% (or 3.0% for 6 months)
  • The U.S. 6-month borrowing rate is 7% (or 3.5% for 6 months)
  • The U.S. 6-month lending rate is 5% (or 2.5% for 6 months)
  • September put options for €625,000; strike price $1.2500, premium price is 1.5%
  • SureDrip's forecast for 6-month spot rates is $1.2700/€
  • The budget rate, or the lowest acceptable sales price for this project, is $1,830,000 or $1.2200/€

If SureDrip chooses to hedge its transaction exposure in the forward market at the available forward rate, the payoff in 6 months will be __________.

End of Question 8

Question 9.
SureDrip would be ____________ by an amount equal to ____________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct.

End of Question 9

Question 10.
SureDrip could hedge the Euro receivables in the money market. Using the information provided how much would the money market hedge return in six months assuming SureDrip reinvests the proceeds at the U.S. investment rate?

End of Question 10

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