Ch008 Management of Transaction Exposure.docx

1、Ch008 Management of Transaction ExposureEun & Resnick 4eCHAPTER 8 Management of Transaction ExposureThree Types of ExposureForward Market HedgeMoney Market HedgeOptions Market HedgeHedging Foreign Currency PayablesForward ContractsMoney Market InstrumentsCurrency Options ContractsCross-Hedging Minor

2、 Currency ExposureHedging Contingent ExposureHedging Recurrent Exposure with Swap ContractsHedging through Invoice CurrencyHedging via Lead and LagExposure NettingInternational Finance in Practice: Riding Shifting Waves of CurrencyShould the Firm Hedge?International Finance in Practice: To Hedge or

3、Not to HedgeThree Types of Exposure1Transaction exposure is defined as:a)the sensitivity of realized domestic currency values of the firms contractual cash flows denominated in foreign currencies to unexpected exchange rate changesb)the extent to which the value of the firm would be affected by unan

4、ticipated changes in exchange ratec)the potential that the firms consolidated financial statement can be affected by changes in exchange ratesd)ex post and ex ante currency exposuresAnswer: a)2The most direct and popular way of hedging transaction exposure is by:a)exchange-traded futures optionsb)cu

5、rrency forward contractsc)foreign currency warrantsd)borrowing and lending in the domestic and foreign money marketsAnswer: b)3If you have a long position in a foreign currency, you can hedge with:a)A short position in an exchange-traded futures optionb)A short position in a currency forward contrac

6、tc)A short position in foreign currency warrantsd)borrowing (not lending) in the domestic and foreign money marketsAnswer: b)4If you a foreign currency denominated debt, you can hedge with:a)A long position in a currency forward contractb)A long position in an exchange-traded futures optionc)Buying

7、the foreign currency today and investing it in the foreign county.d)Both a) and c)Answer: d)5The sensitivity of “realized” domestic currency values of the firms contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is:a)Transaction exposureb)Translation ex

8、posurec)Economic exposured)None of the aboveAnswer: a)6The sensitivity of the firms consolidated financial statements to unexpected changes in the exchange rate is:a)Transaction exposureb)Translation exposurec)Economic exposured)None of the aboveAnswer: b)7The extent to which the value of the firm w

9、ould be affected by unexpected changes in the exchange rate is:a)Transaction exposureb)Translation exposurec)Economic exposured)None of the aboveAnswer: c)8With any hedgea)Your losses on one side should about equal your gains on the other side.b)You should try to make money on both sides of the tran

10、saction: that way you make money coming and going.c)You should spend at least as much time working the hedge as working the underlying deal itself.d)You should agree to anything your banker puts in front of your face.Answer: a)Forward Market Hedge9Suppose that Boeing Corporation exported a Boeing 74

11、7 to British Airways and billed 10 million payable in one year. The money market interest rates and foreign exchange rates are given as follows:The U.S. one-year interest rate: 6.10% per annumThe U.K. one-year interest rate: 9.00% per annumThe spot exchange rate: $1.50/The one-year forward exchange

12、rate$1.46/ Assume that Boeing sells a currency forward contract of 10 million for delivery in one year, in exchange for a predetermined amount of U.S. dollar. Which of the following is (or are) true? On the maturity date of the contract Boeing will:(i)have to deliver 10 million to the bank (the coun

13、terparty of the contract)(ii)take delivery of $14.6 million(iii)have a zero net pound exposure(iv)have a profit, or a loss, depending on the future changes in the exchange rate, from this British salea) (i) and (iv)b) (ii) and (iv)c) (ii), (iii), and (iv)d) (i), (ii), and (iii)Answer: d) 10Suppose t

14、hat Boeing Corporation exported a Boeing 747 to British Airways and billed 10 million payable in one year. The money market interest rates and foreign exchange rates are given as follows:The U.S. one-year interest rate: 6.10% per annumThe U.K. one-year interest rate: 9.00% per annumThe spot exchange

15、 rate: $1.50/The one-year forward exchange rate$1.46/ Assume that Boeing sells a currency forward contract of 10 million for delivery in one year, in exchange for a predetermined amount of U.S. dollar. Suppose that on the maturity date of the forward contract, the spot rate turns out to be $1.40/ (i

16、.e. less than the forward rate of $1.46/). Which of the following is true?a) Boeing would have received $14.0 million, rather than $14.6 million, had it not entered into the forward contractb) Boeing gained $0.6 million from forward hedgingc) a) and b)d) none of the aboveAnswer: c)11Use the followin

17、g table for exchange rate data.Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an Italian firm for 1.000.000 worth of bicycles. Payment from the Italian firm (in ) is due in twelve months. Your firm wants to hedge the receivable into pounds. Not dollars.CountryU.S.

18、$ equiv.Currency per U.S. $TuesdayMondayTuesdayMondayBritain (Pound) 62,5001.60001.61000.6250.62111 Month Forward1.61001.63000.62110.61733 Months Forward1.63001.66000.61730.60246 Months Forward1.66001.72000.60240.581412 Months Forward1.72001.80000.58140.5556Euro 62,5001.20001.20000.8333330.8333331 M

19、onth Forward1.21001.21000.826450.826453 Months Forward1.23001.23000.8130080.8130086 Months Forward1.26001.26000.7936510.79365112 Months Forward1.29001.32000.7751940.7575758Detail a strategy using forward contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of wha

20、t type.a)Borrow 970,873.79 in one year you owe 1m, which will be financed with the receivable. Convert 970,873.79 to dollars at spot, receive $1.165.048,54. Convert dollars to pounds at spot, receive 728.155.34.b)Sell 1m forward using 16 contracts at $1.20 per 1. Buy 750,000 forward using 12 contrac

21、ts at $1.60 per 1c)Sell 1m forward using 16 contracts at the forward rate of $1.29 per 1.d)Sell 1m forward using 16 contracts at the forward rate of $1.29 per 1. Buy 750,000 forward using 12 contracts at the forward rate of $1.72 per 1Answer: d)Rationale: Sell 1m forward using 16 contracts, , at the

22、 forward rate of $1.29 per 1. This results in $1,290,000 which is worth 750.000 at the forward rate of $1.72 per pound. Buy 750.000 forward using 12 contracts, , at the forward rate of $1.72 per 1.12A Japanese EXPORTER has a 1,000,000 receivable due in one year. Spot and forward exchange rate data i

23、s given in the table:Spot exchange rates1-year Forward RatesContract size$1.20 = 1.00$1.25 = 1.0062,500$1.00 = 100$1.00 = 12012,500,000The one-year risk free rates are i$ = 4.03%; i = 6.05%; and i = 1%. Detail a strategy using forward contracts that will hedge exchange rate risk.a)Borrow 970,873.79

24、today; in one year you owe 1m, which will be financed with the receivable. Convert 970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to yen at spot, receive 116,504,854.b)Sell 1m forward using 16 contracts at the forward rate of $1.20 per 1. Buy 150,000,000 forward using 11.52 co

25、ntracts, at the forward rate of $1.00 = 120.c)Sell 1m forward using 16 contracts at the forward rate of $1.25 per 1. Buy 150,000,000 forward using 12 contracts, at the forward rate of $1.00 = 120.d)None of the aboveAnswer: c) Rationale: Sell 1m forward using 16 contracts, at the forward rate of $1.2

26、5 per 1. This results in $1,250,000 which is worth 150,000,000 at the forward rate of $1.00 = 120: . Buy 150m forward using contracts, at the forward rate of $1.00 = 120.13Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The

27、 spot exchange rate is $1.85 = 1.00 and the one-year forward rate is $1.90 = 1.00. The lead time on the order is such that payment is due in one year. What is the fairest exchange rate to use?a)$1.85 = 1.00b)$1.8750 = 1.00c)$1.90 = 1.00d)none of the aboveAnswer: c)Rationale: Payment is due in one ye

28、ar. If they have to pay in dollars, they can hedge with a forward contract at the rate of $1.90 = 1.0014Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an American firm for $1,000,000 worth of bicycles. Payment from the American firm (in U.S. dollars) is due in six

29、months. Detail a strategy using forward contracts that will hedge your exchange rate risk.CountryU.S. $ equiv.Currency per U.S. $TuesdayMondayTuesdayMondayBritain (Pound) 62,5001.80001.81000.55560.55251 Month Forward1.81001.83000.55250.54643 Months Forward1.83001.86000.54640.53766 Months Forward1.86

30、001.82000.53760.549512 Months Forward1.82001.80000.54950.5556a)Go short 12 six-month forward contracts; pay 555,600.b)Go short 16 six-month forward contracts. Pay approximately 537,600c)Go long 12 six-month forward contracts. Receive approximately 549,500.d)Go long 16 six-month forward contracts; ra

31、ise approximately 537,600Answer: d)Rationale: Buy 537,634.41 (a long position in the contract) forward using 12 contracts, , at the forward rate of $1.86 per 1; 537,634.41 = $1,000,000 1/$1.86 15Your firm is a U.S.-based exporter of bicycles. You have sold an order to a French firm for 1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in three month