Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) iShares MSCI are 1)

A) open-end mutual funds sold OTC.
B) exchange traded funds that are subject to U.S. SEC and IRS diversification
requirements.
C) exchange traded funds that are NOT subject to U.S. SEC and IRS diversification
requirements.
D) none of the options

2) A firm may cross-list its share to 2)

A) establish name recognition in foreign capital markets, thus paving the way for the
firm to source new equity and debt capital from investors in different markets.
B) establish a broader investor base for its stock.
C) expose the firm's name to a broader investor and consumer groups.
D) all of the options

3) "Yankee" stock offerings are 3)

A) dollar-denominated shares in foreign companies originally sold to U.S. investors.
B) U.S. stocks held abroad.
C) shares in foreign companies originally sold to U.S. investors.
D) none of the options

4) American Depository Receipt (ADRs) represent foreign stocks 4)

A) denominated in U.S. dollars that trade on European stock exchanges.
B) denominated in a foreign currency that trade on a U.S. stock exchange.
C) denominated in U.S. dollars that trade on a U.S. stock exchange.
D) non-registered (bearer) securities.

5) Sponsored ADRs 5)
A) can trade on the NASDAQ.
B) can trade on the NYSE.
C) are created by a bank at the request of the foreign company that issued the
underlying security.
D) all of the options

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 6) Global Registered Shares 6)
A) can trade in multiple currencies.
B) are created when a MNC issues shares globally.
C) purchased on one exchange (say NYSE) is fully fungible with shares purchased on
another exchange (e.g., Frankfurt Stock Exchange).
D) all of the options

7) Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Suppose 7)
the futures price closes today at $1.46. How much have you made/lost?
A) Depends on your margin balance.
B) You have made $2,500.00.
C) You have neither made nor lost money, yet.
D) You have lost $2,500.00.

8) Comparing "forward" and "futures" exchange contracts, we can say that 8)

A) their major difference is in the way the underlying asset is priced for future
purchase or sale: futures settle daily and forwards settle at maturity, and a futures
contract is negotiated by open outcry between floor brokers or traders and is
traded on organized exchanges, while a forward contract is tailor-made by an
international bank for its clients and is traded OTC.
B) their major difference is in the way the underlying asset is priced for future
purchase or sale: futures settle daily and forwards settle at maturity.
C) they are both "marked-to-market" daily.
D) a futures contract is negotiated by open outcry between floor brokers or traders
and is traded on organized exchanges, while forward contract is tailor-made by an
international bank for its clients and is traded OTC.

9) Comparing "forward" and "futures" exchange contracts, we can say that 9)

A) delivery of the underlying asset is seldom made in futures contracts.
B) delivery of the underlying asset is usually made in forward contracts.
C) delivery of the underlying asset is seldom made in futures contracts and delivery
of the underlying asset is usually made in forward contracts.
D) delivery of the underlying asset is seldom made in either contract—they are
typically cash settled at maturity.

10) In which market does a clearinghouse serve as a third party to all transactions? 10)
A) Swaps B) Futures
C) Forwards D) none of the options

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11) Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Your initial 11)
performance bond is $1,500 and your maintenance level is $500. At what settle price
will you get a demand for additional funds to be posted?
A) $1.208 per €. B) $1.4840 per €.
C) $1.1920 per €. D) $1.5160 per €.

12) Yesterday, you entered into a futures contract to sell €75,000 at $1.79 per €. Your initial 12)
performance bond is $1,500 and your maintenance level is $500. At what settle price
will you get a demand for additional funds to be posted?
A) $1.1840 per €. B) $1.7767 per €.
C) $1.2084 per €. D) $1.6676 per €.

13) Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €. Over 13)
the past three days the contract has settled at $1.50, $1.52, and $1.54. How much have
you made or lost?
A) Lost $0.06 per € or $3,750 B) Made $0.04 per € or $2,500
C) Lost $0.04 per € or $2,500 D) none of the options

14) Today's settlement price on a Chicago Mercantile Exchange (CME) yen futures contract 14)
is $0.8011/¥100. Your margin account currently has a balance of $2,000. The next three
days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The
contractual size of one CME yen contract is ¥12,500,000). If you have a short position
in one futures contract, the changes in the margin account from daily marking-to-market
will result in the balance of the margin account after the third day to be
A) $1,425. B) $2,325. C) $3,425. D) $2,000.

15) The "open interest" shown in currency futures quotations is 15)

A) the total number of people indicating interest in selling the contracts in the near
future.
B) the total number of long or short contracts outstanding for the particular delivery
month.
C) the total number of people indicating interest in buying the contracts in the near
future.
D) the total number of people indicating interest in buying or selling the contracts in
the near future.

16) Which equation is used to define the futures price? 16)

ln(F / E) + .5σ2T F1($ / €) (1 +i$)
A) F1 = B) =
σ T S0($ / €) (1 + i€)

F1($ / €) (1 +i€) CuT - CdT

C) = D) F1 =
S0($ / €) (1 + i$) S0(u - d)

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17) An "option" is 17)
A) a contract giving the owner (buyer) of the option the right, but not the obligation,
to buy (put) or sell (call) a given quantity of an asset at a specified price at some
time in the future.
B) a contract giving the seller (writer) of the option the right, but not the obligation,
to buy (call) or sell (put) a given quantity of an asset at a specified price at some
time in the future.
C) a contract giving the owner (buyer) of the option the right, but not the obligation,
to buy (put) or sell (sell) a given quantity of an asset at a specified price at some
time in the future.
D) a contract giving the owner (buyer) of the option the right, but not the obligation,
to buy (call) or sell (put) a given quantity of an asset at a specified price at some
time in the future.

18) An investor believes that the price of a stock, say IBM's shares, will increase in the next 60 18)
days.
If the investor is correct, which combination of the following investment strategies will show a
profit in all the choices?

(i) buy the stock and hold it for 60 days

(ii) buy a put option
(iii) sell (write) a call option
(iv) buy a call option
(v) sell (write) a put option

A) (i), (ii), and (iv) B) (i), (ii), and (iii)

C) (i), (iv), and (v) D) (ii) and (iii)

19) Which of the follow options strategies are consistent in their belief about the future 19)
behavior of the underlying asset price?
A) Selling calls and selling puts B) Buying calls and selling puts
C) Buying calls and buying puts D) none of the options

20) The primary reasons for a counterparty to use a currency swap are 20)
A) to play in the futures and forward markets.
B) to obtain debt financing in the swapped currency at an interest cost reduction
brought about through comparative advantages each counterparty has in its
national capital market, and the benefit of hedging long-run exchange rate
exposure.
C) to hedge and to speculate, as well as to play in the futures and forward markets.
D) to hedge and to speculate.

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21) A swap bank 21)
A) only sometimes acts as a broker, bringing together counterparties to a swap, but
never ever acts as a dealer, standing ready to buy and sell swaps.
B) can act as a broker, bringing together counterparties to a swap.
C) can act as a broker, bringing together counterparties to a swap and standing ready
to buy and sell swaps.
D) can act as a dealer, standing ready to buy and sell swaps.

22) Suppose the quote for a five-year swap with semiannual payments is 8.50–8.60 percent. 22)
This means
A) the swap bank will receive semiannual fixed-rate dollar payments of 8.60 percent
against paying six-month dollar LIBOR.
B) the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent
against receiving six-month dollar LIBOR, and the swap bank will receive
semiannual fixed-rate dollar payments of 8.60 percent against paying six-month
dollar LIBOR.
C) the swap bank will pay semiannual fixed-rate dollar payments of 8.50 percent
against receiving six-month dollar LIBOR.
D) none of the options

23) Suppose the quote for a five-year swap with semiannual payments is 8.50−8.60 percent in dollars 23)
and 6.60−6.80 percent in euro against six-month dollar LIBOR. This means
A) the swap bank will enter into a currency swap in which it would pay semiannual
fixed-rate dollar payments of 8.50 percent against receiving semiannual fixed-rate
euro payments of 6.80, and the swap bank will enter into a currency swap in which
it would pay semiannual fixed-rate euro payments of 6.60 percent against
receiving semiannual fixed-rate dollar payments of 8.60.
B) the swap bank will enter into a currency swap in which it would pay semiannual
fixed-rate dollar payments of 8.50 percent against receiving semiannual fixed-rate
euro payments of 6.80.
C) the swap bank will enter into a currency swap in which it would pay semiannual
fixed-rate euro payments of 6.60 percent against receiving semiannual fixed-rate
dollar payments of 8.60.
D) none of the options

24) Use the following information to calculate the quality spread differential (QSD). 24)

Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost

Company X 10 % LIBOR
Company Y 12 % LIBOR + 1.5%

A) 0.50 percent B) 1.00 percent C) 1.50 percent D) 2.00 percent

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25) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow25)
$10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Fixed-Rate Floating-Rate
Borrowing Cost Borrowing Cost
Company X 10% LIBOR
Company Y 12% LIBOR + 1.5%

A swap bank proposes the following interest only swap:

X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15
percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a
fixed rate of 9.90 percent. What is the value of this swap to company X?
A) Company X will save 25 basis points per year on $10,000,000 = $25,000 per year.
B) Company X will lose money on the deal.
C) Company X will save 5 basis points per year on $10,000,000 = $5,000 per year.
D) Company X will only break even on the deal.

26) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow26)
$10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Fixed-Rate Floating-Rate
Borrowing Cost Borrowing Cost
Company X 10% LIBOR
Company Y 12% LIBOR + 1.5%

A swap bank proposes the following interest only swap:

Y will pay the swap bank annual payments on $10,000,000 with a fixed rate of rate of 9.90
percent. In exchange the swap bank will pay to company Y interest payments on $10,000,000 at
LIBOR − 0.15 percent; What is the value of this swap to company Y?
A) Company Y will save 5 basis points per year on $10,000,000 = $5,000 per year.
B) Company Y will only break even on the deal.
C) Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year.
D) Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year.

27) Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow27)
$10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Fixed-Rate Floating-Rate
Borrowing Cost Borrowing Cost
Company X 10% LIBOR
Company Y 12% LIBOR + 1.5%

A swap bank proposes the following interest only swap:

X will pay the swap bank annual payments on $10,000,000 with the coupon rate of LIBOR − 0.15
percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a
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 fixed rate of 9.90 percent. Y will pay the swap bank interest payments on $10,000,000 at a fixed
rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the
coupon rate of LIBOR − 0.15 percent.

What is the value of this swap to the swap bank?

A) The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per
year.
B) The swap bank will break even.
C) The swap bank will lose money on the deal.
D) none of the options

28) Company X wants to borrow $10,000,000 for 5 years; company Y wants to borrow £5,000,000 28) for
5 years. The exchange rate is $2 = £1 and is not expected to change over the next 5 years. Their
external borrowing opportunities are shown here:

$ Borrowing £ Borrowing
Cost Cost
Company X $ 10 % £ 10.5 %
Company Y $ 12 % £ 13 %

A swap bank proposes the following interest only swap:

X will pay the swap bank annual payments on $10,000,000 with the coupon rate of 9.80 percent;
in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed
rate of 10.5 percent. Y will pay the swap bank interest payments on £5,000,000 at a fixed rate of
12.80 percent and the swap bank will pay Y annual payments on $10,000,000 with the
coupon rate of 12 percent.

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 What is the value of this swap to the swap bank?
A) The swap bank will earn 10 basis points per year but has exchange rate risk:
dollar-denominated income and pound-denominated costs and default risk.
B) The swap bank will earn 20 basis points per year in dollars but has exchange rate
risk: pound-denominated income and dollar-denominated costs and default risk.
C) The swap bank will earn 10 basis points per year but has exchange rate risk:
pound-denominated income and dollar-denominated costs and default risk.
D) The swap bank will earn 10 basis points per year; the only risk is default risk.

29) Transaction exposure is defined as 29)

A) the sensitivity of realized domestic currency values of the firm's contractual cash
flows denominated in foreign currencies to unexpected exchange rate changes.
B) the potential that the firm's consolidated financial statement can be affected by
changes in exchange rates.
C) ex post and ex ante currency exposures.
D) the extent to which the value of the firm would be affected by unanticipated
changes in exchange rate.

30) If you have a long position in a foreign currency, you can hedge with 30)
A) a short position in foreign currency warrants.
B) a short position in a currency forward contract.
C) borrowing (not lending) in the domestic and foreign money markets.
D) a short position in an exchange-traded futures option.

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31) Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million 31)
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 annum

The euro zone one-year interest rate: 9.00 % per annum
The spot exchange 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. dollars. Which of the following is/are true? On the
maturity date of the contract Boeing will

(i) have to deliver €10 million to the bank (the counter party of the forward contract).
(ii) take delivery of $14.6 million
(iii) have a zero net euro exposure
(iv) have a profit, or a loss, depending on the future changes in the exchange rate, from
this British sale.
A) (ii) and (iv) B) (ii), (iii), and (iv)
C) (i) and (iv) D) (i), (ii), and (iii)

32) Your firm is a U.K.-based exporter of bicycles. You have sold an order to a French firm for32)
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in 12 months. Detail
a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of
how many contracts of what type and maturity.

U.S. $ equiv. Currency per U.S. $

Contract Size Country Tuesday Monday Tuesday Monday
Britain 1.940
£ 10,000 $ 1.9600 $ £ 0.5102 £ 0.5155
(pound) 0
1 month 1.950
$ 1.9700 $ £ 0.5076 £ 0.5128
forward 0
3 months 1.960
$ 1.9800 $ £ 0.5051 £ 0.5102
forward 0
6 months 1.970
$ 1.9900 $ £ 0.5025 £ 0.5076
forward 0
12
1.980
months $ 2.0000 $ £ 0.5000 £ 0.5051
0
forward
1.540
€ 10,000 Euro $ 1.5600 $ € 0.6410 € 0.6494
0
1 month 1.550
$ 1.5700 $ € 0.6369 € 0.6452
forward 0
3 months 1.560
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 3 months 1.560
$ 1.5800 $ € 0.6329 € 0.6410
forward 0
6 months 1.570
$ 1.5900 $ € 0.6289 € 0.6369
forward 0
12
1.580
months $ 1.6000 $ € 0.6250 € 0.6329
0
forward
Swiss 0.900 SFr
SFr. 10,000 $ 0.9200 $ SFr. 1.0870 1.1111
franc 0 .
1 month 0.920 SFr
$ 0.9400 $ SFr. 1.0638 1.0870
forward 0 .
3 months 0.940 SFr
$ 0.9600 $ SFr. 1.0417 1.0638
forward 0 .
6 months 0.960 SFr
$ 0.9800 $ SFr. 1.0204 1.0417
forward 0 .
12
0.980 SFr
months $ 1.0000 $ SFr. 1.0000 1.0204
0 .
forward
A) Go long 100 12-month euro futures contracts; and long 80 12-month pound
futures contracts.
B) Go long 100 12-month euro futures contracts; and short 80 12-month pound
futures contracts.
C) Go short 100 12-month euro futures contracts; and long 80 12-month pound
futures contracts.
D) Go short 100 12-month euro futures contracts; and short 80 12-month pound
futures contracts.
E) none of the options

33) Your firm is a Swiss importer of bicycles. You have placed an order with an Italian firm for33)
€1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Detail a strategy using
futures contracts that will hedge your exchange rate risk. Have an estimate of how many
contracts of what type and maturity.

U.S. $ equiv. Currency per U.S. $

Contract Size Country Tuesday Monday Tuesday Monday
Britain 1.940
£ 10,000 $ 1.9600 $ £ 0.5102 £ 0.5155
(pound) 0
1 month 1.950
$ 1.9700 $ £ 0.5076 £ 0.5128
forward 0
3 months 1.960
$ 1.9800 $ £ 0.5051 £ 0.5102
forward 0
6 months 1.970
$ 1.9900 $ £ 0.5025 £ 0.5076
forward 0
12
1.980
10
 12
1.980
months $ 2.0000 $ £ 0.5000 £ 0.5051
0
forward
1.540
€ 10,000 Euro $ 1.5600 $ € 0.6410 € 0.6494
0
1 month 1.550
$ 1.5700 $ € 0.6369 € 0.6452
forward 0
3 months 1.560
$ 1.5800 $ € 0.6329 € 0.6410
forward 0
6 months 1.570
$ 1.5900 $ € 0.6289 € 0.6369
forward 0
12
1.580
months $ 1.6000 $ € 0.6250 € 0.6329
0
forward
Swiss 0.900 SFr
SFr. 10,000 $ 0.9200 $ SFr. 1.0870 1.1111
franc 0 .
1 month 0.920 SFr
$ 0.9400 $ SFr. 1.0638 1.0870
forward 0 .
3 months 0.940 SFr
$ 0.9600 $ SFr. 1.0417 1.0638
forward 0 .
6 months 0.960 SFr
$ 0.9800 $ SFr. 1.0204 1.0417
forward 0 .
12
0.980 SFr
months $ 1.0000 $ SFr. 1.0000 1.0204
0 .
forward
A) Go short 100 12-month euro futures contracts; and long 160 12-month Swiss franc
futures contracts.
B) Go long 100 12-month euro futures contracts; and long 160 12-month Swiss franc
futures contracts.
C) Go long 100 12-month euro futures contracts; and short 160 12-month Swiss franc
futures contracts.
D) Go short 100 12-month euro futures contracts; and short 160 12-month Swiss
franc futures contracts.
E) none of the options

11
34) Your firm is a U.K.-based exporter of bicycles. You have sold an order to a French firm for34)
€1,000,000 worth of bicycles. Payment from the French firm (in euro) is due in 12 months. Use a
money market hedge to redenominated this one-year receivable into a pound-denominated
receivable with a one-year maturity.

Currency per
Contract Size Country U.S. $ equiv. U.S. $
Britain
£ 10,000 $ 1.9600 £ 0.5102
(pound) interest APR
12 months
$ 2.0000 £ 0.5000 rates
forward
€ 10,000 Euro $ 1.5600 € 0.6410 i$ = 1%
12 months
$ 1.6000 € 0.6250 i€ = 2%
forward
Swiss
SFr. 10,000 $ 0.9200 SFr. 1.0870 i£ = 3%
franc
12 months iSFr
$ 1.0000 SFr. 1.0000 = 4%
forward .

The following were computed without rounding. Select the answer closest to yours.
A) £72,352.94 B) £780,312.13 C) €800,000 D) £803,721.49

35) Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm
35)for
€1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Use a money market hedge
to redenominate this one-year receivable into a pound-denominated receivable with a one-year
maturity.

Currency per
Contract Size Country U.S. $ equiv. U.S. $
Britain
£ 10,000 $ 1.9600 £ 0.5102
(pound) interest APR
12 months
$ 2.0000 £ 0.5000 rates
forward
€ 10,000 Euro $ 1.5600 € 0.6410 i$ = 1%
12 months
$ 1.6000 € 0.6250 i€ = 2%
forward
Swiss
SFr. 10,000 $ 0.9200 SFr. 1.0870 i£ = 3%
franc
12 months iSFr
$ 1.0000 SFr. 1.0000 = 4%
forward .

The following were computed without rounding. Select the answer closest to yours.
A) £780,312.13 B) £72,352.94 C) £803,721.49 D) €800,000

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36) A Japanese exporter has a €1,000,000 receivable due in one year. Detail a strategy using a 36)
money market hedge that will eliminate any exchange rate risk.

1-year rates of interest

Borrowing Lending
Dollar 4.5 % 4.00 %
Euro 6.00 % 5.25 %
Yen 1.00 % 0.75 %

Spot exchange rates 1-year Forward Rates

$ 1.25 = € 1.00 $ 1.2262 = € 1.00
$ 1.00 = ¥ 100 $ 1.03 = ¥ 100

A) Convert ¥117,924,528.30 to dollars at the spot rate; convert dollars to euro at the
spot rate; lend €943,396.22 at 5.25 percent.
B) Borrow €943,396.22 today. Convert the euro to dollars at the spot exchange rate,
convert these dollars to yen at the spot rate, receive ¥117,924,528.30.
C) Borrow €970,873.79 today. Convert the euro to dollars at the spot exchange rate,
receive $1,165,048.54. Convert these dollars to yen at the spot rate, receive ¥.
D) Lend €943,396.22 today. Convert the euro to dollars at the spot exchange rate,
convert these dollars to yen at the spot rate.

37) A Japanese importer has a €1,000,000 payable due in one year. 37)

Spot exchange rates 1-year Forward Rates Contract size

$ 1.20 = € 1.00 $ 1.25 = € 1.00 € 62,500
$ 1.00 = ¥ 100 $ 1.00 = ¥ 120 ¥ 12,500,000

The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy
using forward contracts that will hedge his exchange rate risk. Have an estimate of how
many contracts of what type.
A) Go short in 16 yen forward contracts. Go long in 12 euro contracts.
B) Go long in 12 yen forward contracts. Go short in 16 euro contracts.
C) Go short in 12 yen forward contracts. Go long in 16 euro contracts.
D) none of the options

13
38) A Japanese exporter has a €1,000,000 receivable due in one year. Detail a strategy using 38)
options that will eliminate exchange rate risk.

Listed Options
Strike Puts Calls
Euro€62,500 $ 1.25 = € 1.00 $ 0.0075per€ $ 0.01 per€
per¥10
Yen¥12,500,000 $ 1.00 = ¥ 100 $ 0.0075per¥100 0.01
0

A) Sell 16 call options on euro, buy 10 put options on yen.

B) Buy 16 put options on euro, buy 10 call options on yen.
C) Buy 16 put options on euro, sell 10 call options on yen.
D) none of the options

39) A Japanese exporter has a €1,000,000 receivable due in one year. Estimate the cost today 39)
of an options strategy that will eliminate exchange rate risk.

Listed Options
Strike Puts Calls
Euro€62,500 $ 1.25 = € 1.00 $ 0.0075per€ $ 0.01 per€
per¥10
Yen¥12,500,000 $ 1.00 = ¥ 100 $ 0.0075per¥100 0.01
0

A) $12,500 B) $5,000
C) $20,000 D) none of the options

40) A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to 40)
A) a put option on £10,000 at a strike price of $1.80 = £1.00.
B) a put option to sell $18,000 at a strike price of $1.80 = £1.00.
C) a call option on $18,000 at a strike price of $1.80 = £1.00.
D) none of the options

41) A put option to sell $18,000 at a strike price of $1.80 = £1.00 is equivalent to 41)
A) a call option on $18,000 at a strike price of $1.80 = £1.00.
B) a put option on £10,000 at a strike price of $1.80 = £1.00.
C) a call option to buy £10,000 at a strike price of $1.80 = £1.00.
D) none of the options

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42) Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the 42)
following will hedge your liability?
A) Buy a call option on £100,000 with a strike price in dollars.
B) Buy the present value of £100,000 today at the spot exchange rate, invest in the
U.K. at i£.
C) Take a long position in a forward contract on £100,000 with a 3-month maturity.
D) all of the options

43) When cross-hedging, 43)

A) the main thing is to find one asset that covaries with another asset in some
predictable way.
B) try to find one asset that has a positive correlation with another asset.
C) try to find one asset that has a negative correlation with another asset.
D) none of the options

44) Contingent exposure can best be hedged with 44)

A) options. B) futures.
C) money market hedging. D) all of the options

45) Generally speaking, a firm with recurrent exposure can best hedge using which 45)
product?
A) Futures B) Swaps
C) Options D) all of the options

46) An exporter can shift exchange rate risk to their customers by 46)
A) invoicing in their home currency.
B) invoicing sales in a currency basket such as the SDR as the invoice currency.
C) splitting the difference, and invoicing half of sales in local currency and half of
sales in home currency.
D) invoicing in their customer's local currency.

47) An exporter faced with exposure to a depreciating currency can reduce transaction 47)
exposure with a strategy of
A) paying late, collecting early. B) paying early, collecting late.
C) paying or collecting early. D) paying or collecting late.

15
Answer Key
Testname: IFN2

1) B
2) D
3) A
4) C
5) D
6) D
7) D
8) A
9) C
10) B
11) B
12) B
13) C
14) B
15) B
16) B
17) D
18) C
19) B
20) B
21) C
22) B
23) A
24) A
25) C
26) C
27) A
28) C
29) A
30) B
31) D
32) C
33) C
34) D
35) C
36) B
37) C
38) B
39) C
40) B
41) C
42) D
16
Answer Key
Testname: IFN2

43) A
44) A
45) B
46) A
47) A

17