Question 1Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:Answersell euros forwardpurchase euro currency put options.purchase euro currency call options.purchase euros forward.remain unhedged0.25 points Question 2Jacko Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Kriner Co. is a U.S.-based MNC that has the same exposure as Jacko Co. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk?AnswerJacko Co.Kriner Co.the firms have about the same level of exposure.neither firm has any exposure.0.25 points Question 3To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.Answerreceivable; purchasepayable; sellpayable; purchasenone of the above0.25 points Question 4In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be:Answerhighly positive.highly negative.zero.none of the above0.25 points Question 5Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in Greece. Both subsidiaries frequently remit their earnings back to the parent company. The German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S. dollars this year? The exchange rate for the euro is $1.05.Answer$3,675,000 outflow$525,000 outflow$525,000 inflow$210,000 outflow0.25 points Question 6Exhibit 11-1U.S.Jordan360-day borrowing rate6%5%360-day deposit rate5%4%Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. The current spot rate of the dinar is $1.48, while the 360-day forward rate is $1.50. How much will Perkins receive in 360 days from implementing a money market hedge (assume any receipts before the date of the receivable are invested)?Answer$377,115.$373,558.$363,019.$370,000.0.25 points Question 7Transaction exposure reflects:Answerthe exposure of a firm’s international contractual transactions to exchange rate fluctuations.the exposure of a firm’s local currency value to transactions between foreign exchange traders.the exposure of a firm’s financial statements to exchange rate fluctuations.the exposure of a firm’s cash flows to exchange rate fluctuations.0.25 points Question 8Assume the following information:U.S. deposit rate for 1 year=11%U.S. borrowing rate for 1 year=12%New Zealand deposit rate for 1 year=8%New Zealand borrowing rate for 1 year=10%New Zealand dollar forward rate for 1 year=$.40New Zealand dollar spot rate=$.39Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?Answer$238,584.$240,000.$234,000.$236,127.0.25 points Question 9Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is $2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period.Answer$391,210.$396,190.$388,210.$384,761.none of the above0.25 points Question 10Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today’s spot rate of the NZ$ is $.50, and the 180-day forward rate is $.51. A call option on NZ$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of $.51, a premium of $.02, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days:Possible Spot Ratein 90 DaysProbability$.4810%$.4960%$.5530%The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ____ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).Answer10%30%40%70%none of the above0.25 points Question 11Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?Answerpurchase a currency put option in British pounds.sell pounds forward.borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.A and B0.25 points Question 12Assume that the British pound and Swiss franc are highly correlated. A U.S. firm anticipates the equivalent of $1 million cash outflows in francs and the equivalent of $1 million cash outflows in pounds. During a ____ cycle, the firm is ____ affected by its exposure.Answerstrong dollar; favorablyweak dollar; notstrong dollar; notweak dollar; favorably0.25 points Question 13A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm’s local currency should:Answerincrease local sales as it reduces foreign competition in local markets.increase the firm’s exports denominated in the local currency.increase the returns earned on the firm’s foreign bank deposits.increase the firm’s cash outflow required to pay for imported supplies denominated in a foreign currency.none of the above0.25 points Question 14U.S. based Majestic Co. sells products to U.S. consumers and purchases all of materials from U.S. suppliers. Its main competitor is located in Belgium. Majestic Co. is subject to:Answereconomic exposure.translation exposure.transaction exposure.no exposure to exchange rate fluctuations.0.25 points Question 15Which of the following is not a form of exposure to exchange rate fluctuations?Answertransaction exposure.credit exposure.economic exposure.translation exposure.0.25 points Question 16Assume that Smith Corporation will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $.04. A put option exists on British pounds, with an exercise price of $1.69, a 90-day expiration date, and a premium of $.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium.Answer$360,000.$338,000.$332,000.$336,000.$344,000.0.25 points Question 17Yomance Co. is a U.S. company that has exposure to Japanese yen and British pounds. It has net inflows of 5,000,000 yen and net outflows of 60,000 pounds. The present exchange rate of the Japanese yen is $.012 while the present exchange rate of the British pound is $1.50. Yomance Co. has not hedged its positions. The yen and pound movements against the dollar are highly and positively correlated. If the dollar strengthens, then Yomance Co. will:Answerbenefit, because the dollar value of its pound position exceeds the dollar value of its yen position.benefit, because the dollar value of its yen position exceeds the dollar value of its pound position.be adversely affected, because the dollar value of its pound position exceeds the dollar value of its yen position.be adversely affected, because the dollar value of its yen position exceeds the dollar value of its pound position.0.25 points Question 18Sarakose Co. is a U.S. company with sales to Canada amounting to C$5 million. Its cost of materials attributable to the purchase of Canadian goods is C$7 million. Its interest expense on Canadian loans is C$5 million. The dollar value of Sarakose’s “earnings before interest and taxes” would ____ if the Canadian dollar appreciates; the dollar value of its cash flows would ____ if the Canadian dollar appreciates.Answerincrease; increasedecrease; increasedecrease; decreaseincrease; decreaseincrease; be unaffected0.25 points Question 19Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase dollar-denominated expenses by $800,000. This strategy would ____ the Sycamore’s exposure to changes in the peso’s movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued ____ relative to the dollar.Answerreduce; highreduce; lowincrease; lowincrease; high0.25 points Question 20A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.Answer$1,169,000.$1,099,000.$1,106,000.$1,143,100.$1,134,000.