20. Your firm is bidding on a large construction contract in a foreign country. This contingent exposure could best be hedged
A. with put options on the foreign currency. B. with call options on the foreign currency.
C. both a) and b), depending upon the specifics (\D. with futures contracts.
21. An exporter faced with exposure to an appreciating currency can reduce transaction exposure with a strategy of
A. paying or collecting early. B. paying or collecting late. C. paying late, collecting early. D. paying early, collecting late.
22. In evaluating the pros and cons of corporate risk management, one argument against hedging is
A. if the corporate guys were good at forecasting exchange rates, they would make more money on Wall Street, so only incompetent managers are left at corporations to hedge. B. shareholders who are diversified have already managed their exchange rate risk. C. the hedging costs go into someone else's pocket. D. none of the above.
Answer Key (corrected): 1. A 2. B 3. D 4. A 5. A 6. B 7. C 8. B 9. C 10. D 11. B 12. A 13. B 14. C 15. A 16. A 17. C 18. A 19. B 20. C 21. D 22. B Solutions: Question 8: The U.K.- based exporter must sell $1,000,000 to exchange for British pounds when receive the payment from the American firm. So the exporter must enter the short position for the forward contract.
Number of forward contract is computed as follows,
$1,000,000 * 0.5376 ￡/$ / ￡62,500 = 8.6 ≈ 9 forward contracts Question 9: Cost of Put Option = �1,000,000 * 0.01$/� = $10,000
Based on the striking price of put option, the amount that the U.S. firm will be paid in one year equals to �1,000,000* 1.65$/� = $1,650,000
After paying the option premium, the realized sales of euros equals to $1,650,000-$10,000 = $1,640,000.
