Ch008 Management of Transaction Exposure.docx

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Ch008 Management of Transaction Exposure.docx

Ch008ManagementofTransactionExposure

Eun&Resnick4e

CHAPTER8ManagementofTransactionExposure

ThreeTypesofExposure

ForwardMarketHedge

MoneyMarketHedge

OptionsMarketHedge

HedgingForeignCurrencyPayables

ForwardContracts

MoneyMarketInstruments

CurrencyOptionsContracts

Cross-HedgingMinorCurrencyExposure

HedgingContingentExposure

HedgingRecurrentExposurewithSwapContracts

HedgingthroughInvoiceCurrency

HedgingviaLeadandLag

ExposureNetting

InternationalFinanceinPractice:

RidingShiftingWavesofCurrency

ShouldtheFirmHedge?

InternationalFinanceinPractice:

ToHedgeorNottoHedge

ThreeTypesofExposure

1Transactionexposureisdefinedas:

a)thesensitivityofrealizeddomesticcurrencyvaluesofthefirm’scontractualcashflowsdenominatedinforeigncurrenciestounexpectedexchangeratechanges

b)theextenttowhichthevalueofthefirmwouldbeaffectedbyunanticipatedchangesinexchangerate

c)thepotentialthatthefirm’sconsolidatedfinancialstatementcanbeaffectedbychangesinexchangerates

d)expostandexantecurrencyexposures

Answer:

a)

2Themostdirectandpopularwayofhedgingtransactionexposureisby:

a)exchange-tradedfuturesoptions

b)currencyforwardcontracts

c)foreigncurrencywarrants

d)borrowingandlendinginthedomesticandforeignmoneymarkets

Answer:

b)

3Ifyouhavealongpositioninaforeigncurrency,youcanhedgewith:

a)Ashortpositioninanexchange-tradedfuturesoption

b)Ashortpositioninacurrencyforwardcontract

c)Ashortpositioninforeigncurrencywarrants

d)borrowing(notlending)inthedomesticandforeignmoneymarkets

Answer:

b)

4

Ifyouaforeigncurrencydenominateddebt,youcanhedgewith:

a)Alongpositioninacurrencyforwardcontract

b)Alongpositioninanexchange-tradedfuturesoption

c)Buyingtheforeigncurrencytodayandinvestingitintheforeigncounty.

d)Botha)andc)

Answer:

d)

5Thesensitivityof“realized”domesticcurrencyvaluesofthefirm’scontractualcashflowsdenominatedinforeigncurrencytounexpectedchangesintheexchangerateis:

a)Transactionexposure

b)Translationexposure

c)Economicexposure

d)Noneoftheabove

Answer:

a)

6Thesensitivityofthefirm’sconsolidatedfinancialstatementstounexpectedchangesintheexchangerateis:

a)Transactionexposure

b)Translationexposure

c)Economicexposure

d)Noneoftheabove

Answer:

b)

7Theextenttowhichthevalueofthefirmwouldbeaffectedbyunexpectedchangesintheexchangerateis:

a)Transactionexposure

b)Translationexposure

c)Economicexposure

d)Noneoftheabove

Answer:

c)

8Withanyhedge

a)Yourlossesononesideshouldaboutequalyourgainsontheotherside.

b)Youshouldtrytomakemoneyonbothsidesofthetransaction:

thatwayyoumakemoneycomingandgoing.

c)Youshouldspendatleastasmuchtimeworkingthehedgeasworkingtheunderlyingdealitself.

d)Youshouldagreetoanythingyourbankerputsinfrontofyourface.

Answer:

a)

 

ForwardMarketHedge

9SupposethatBoeingCorporationexportedaBoeing747toBritishAirwaysandbilled£10millionpayableinoneyear.Themoneymarketinterestratesandforeignexchangeratesaregivenasfollows:

TheU.S.one-yearinterestrate:

6.10%perannum

TheU.K.one-yearinterestrate:

9.00%perannum

Thespotexchangerate:

$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,fromthisBritishsale

a)(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%perannum

TheU.K.one-yearinterestrate:

9.00%perannum

Thespotexchangerate:

$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,haditnotenteredintotheforwardcontract

b)Boeinggained$0.6millionfromforwardhedging

c)a)andb)

d)noneoftheabove

Answer:

c)

11

Usethefollowingtableforexchangeratedata.

YourfirmisaU.K.-basedexporterofBritishbicycles.YouhavesoldanordertoanItalianfirmfor€1.000.000worthofbicycles.PaymentfromtheItalianfirm(in€)isdueintwelvemonths.Yourfirmwantstohedgethereceivableintopounds.Notdollars.

Country

U.S.$equiv.

CurrencyperU.S.$

Tuesday

Monday

Tuesday

Monday

Britain(Pound)£62,500

1.6000

1.6100

0.625

0.6211

1MonthForward

1.6100

1.6300

0.6211

0.6173

3MonthsForward

1.6300

1.6600

0.6173

0.6024

6MonthsForward

1.6600

1.7200

0.6024

0.5814

12MonthsForward

1.7200

1.8000

0.5814

0.5556

Euro€62,500

1.2000

1.2000

0.833333

0.833333

1MonthForward

1.2100

1.2100

0.82645

0.82645

3MonthsForward

1.2300

1.2300

0.813008

0.813008

6MonthsForward

1.2600

1.2600

0.793651

0.793651

12MonthsForward

1.2900

1.3200

0.775194

0.7575758

Detailastrategyusingforwardcontractsthatwillhedgeyourexchangeraterisk.Haveanestimateofhowmanycontractsofwhattype.

a)Borrow€970,873.79inoneyearyouowe€1m,whichwillbefinancedwiththereceivable.Convert€970,873.79todollarsatspot,receive$1.165.048,54.Convertdollarstopoundsatspot,receive£728.155.34.

b)Sell€1mforwardusing16contractsat$1.20per€1.Buy£750,000forwardusing12contractsat$1.60per£1

c)Sell€1mforwardusing16contractsattheforwardrateof$1.29per€1.

d)Sell€1mforwardusing16contractsattheforwardrateof$1.29per€1.Buy£750,000forwardusing12contractsattheforwardrateof$1.72per£1

Answer:

d)

Rationale:

Sell€1mforwardusing16contracts,

attheforwardrateof$1.29per€1.Thisresultsin$1,290,000whichisworth£750.000attheforwardrateof$1.72perpound.Buy£750.000forwardusing12contracts,

attheforwardrateof$1.72per£1.

 

12AJapaneseEXPORTERhasa€1,000,000receivabledueinoneyear.Spotandforwardexchangeratedataisgiveninthetable:

Spotexchangerates

1-yearForwardRates

Contractsize

$1.20=€1.00

$1.25=€1.00

€62,500

$1.00=¥100

$1.00=¥120

¥12,500,000

Theone-yearriskfreeratesarei$=4.03%;i€=6.05%;andi¥=1%.Detailastrategyusingforwardcontractsthatwillhedgeexchangeraterisk.

a)Borrow€970,873.79today;inoneyearyouowe€1m,whichwillbefinancedwiththereceivable.Convert€970,873.79todollarsatspot,receive$1,165,048.54.Convertdollarstoyenatspot,receive¥116,504,854.

b)Sell€1mforwardusing16contractsattheforwardrateof$1.20per€1.Buy¥150,000,000forwardusing11.52contracts,attheforwardrateof$1.00=¥120.

c)Sell€1mforwardusing16contractsattheforwardrateof$1.25per€1.Buy¥150,000,000forwardusing12contracts,attheforwardrateof$1.00=¥120.

d)Noneoftheabove

Answer:

c)

Rationale:

Sell€1mforwardusing16contracts,

attheforwardrateof$1.25per€1.Thisresultsin$1,250,000whichisworth¥150,000,000attheforwardrateof$1.00=¥120:

.Buy¥150mforwardusing

contracts,attheforwardrateof$1.00=¥120.

13YourfirmhasaBritishcustomerthatiswillingtoplacea$1millionorder,butwantstopayinpoundsinsteadofdollars.Thespotexchangerateis$1.85=£1.00andtheone-yearforwardrateis$1.90=£1.00.Theleadtimeontheorderissuchthatpaymentisdueinoneyear.Whatisthefairestexchangeratetouse?

a)$1.85=£1.00

b)$1.8750=£1.00

c)$1.90=£1.00

d)noneoftheabove

Answer:

c)

Rationale:

Paymentisdueinoneyear.Iftheyhavetopayindollars,theycanhedgewithaforwardcontractattherateof$1.90=£1.00

14

YourfirmisaU.K.-basedexporterofBritishbicycles.YouhavesoldanordertoanAmericanfirmfor$1,000,000worthofbicycles.PaymentfromtheAmericanfirm(inU.S.dollars)isdueinsixmonths.Detailastrategyusingforwardcontractsthatwillhedgeyourexchangeraterisk.

Country

U.S.$equiv.

CurrencyperU.S.$

Tuesday

Monday

Tuesday

Monday

Britain(Pound)£62,500

1.8000

1.8100

0.5556

0.5525

1MonthForward

1.8100

1.8300

0.5525

0.5464

3MonthsForward

1.8300

1.8600

0.5464

0.5376

6MonthsForward

1.8600

1.8200

0.5376

0.5495

12MonthsForward

1.8200

1.8000

0.5495

0.5556

a)Goshort12six-monthforwardcontracts;pay£555,600.

b)Goshort16six-monthforwardcontracts.Payapproximately£537,600

c)Golong12six-monthforwardcontracts.Receiveapproximately£549,500.

d)Golong16six-monthforwardcontracts;raiseapproximately£537,600

Answer:

d)

Rationale:

Buy£537,634.41(alongpositioninthecontract)forwardusing12contracts,

attheforwardrateof$1.86per£1;£537,634.41=$1,000,000×£1/$1.86

15YourfirmisaU.S.-basedexporterofbicycles.YouhavesoldanordertoaFrenchfirmfor€1,000,000worthofbicycles.PaymentfromtheFrenchfirm(ineuro)isdueinthreemonth

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