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Chapter 11—Managing Transaction Exposure1. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spotrate 90 days from now, then the real cost of hedging payables will be:a. positive.b. negative.c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits adiscount.d. zero.ANS: D PTS: 12. Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days fromnow, then the real cost of hedging payables will be:a. positive.b. negative.c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits adiscount.d. zero.ANS: A PTS: 13. Assume the following information:U.S. deposit rate for 1 year = 11%U.S. borrowing rate for 1 year = 12%Swiss deposit rate for 1 year = 8%Swiss borrowing rate for 1 year = 10%Swiss forward rate for 1 year = $.40Swiss franc spot rate = $.39Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year.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 forward hedge?a. $234,000.b. $238,584.c. $240,000.d. $236,127.ANS: CSOLUTION: SF600,000 $.40 = $240,000PTS: 14. Assume 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?a. $238,584.b. $240,000.c. $234,000.d. $236,127.ANS: DSOLUTION:1. Borrow NZ$545,455 (NZ$600,000/1.1) = NZ$545,455.2. Convert NZ$545,455 to $212,727 (at $.39 per NZ$).3. Invest $212,727 to accumulate $236,127 ($212,727 1.11) = $236,127.PTS: 15. An example of cross-hedging is:a. find two currencies that are highly positively correlated; match the payables of the onecurrency to the receivables of the other currency.b. use the forward market to sell forward whatever currencies you will receive.c. use the forward market to buy forward whatever currencies you will receive.d. B and CANS: A PTS: 16. Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm?a. purchase a currency put option in British pounds.b. sell pounds forward.c. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.d. A and BANS: D PTS: 17. Which of the following reflects a hedge of net payables on British pounds by a U.S. firm?a. purchase a currency put option in British pounds.b. sell pounds forward.c. sell a currency call option in British pounds.d. borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.e. A and BANS: D PTS: 18. If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros butwanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be:a. a money market hedge.b. purchasing euro put options.c. a forward purchase of euros.d. purchasing euro call options.e. selling euro call options.ANS: D PTS: 19. If Salerno Inc. desired to lock in a minimum rate at which it could sell its net receivables in Japaneseyen but wanted to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:a. a money market hedge.b. a forward sale of yen.c. purchasing yen call options.d. purchasing yen put options.e. selling yen put options.ANS: D PTS: 110. The real cost of hedging payables with a forward contract equals:a. the nominal cost of hedging minus the nominal cost of not hedging.b. the nominal cost of not hedging minus the nominal cost of hedging.c. the nominal cost of hedging divided by the nominal cost of not hedging.d. the nominal cost of not hedging divided by the nominal cost of hedging.ANS: A PTS: 111. From the perspective of Detroit Co., which has payables in Mexican pesos and receivables in Canadiandollars, hedging the payables would be most desirable if the expected real cost of hedging payables is ____, and hedging the receivables would be most desirable if the expected real cost of hedgingreceivables is ____.a. negative; positiveb. zero; positivec. zero; zerod. positive; negativee. negative; negativeANS: E PTS: 112. Use the following information to calculate the dollar cost of using a money market hedge to hedge200,000 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.a. $391,210.b. $396,190.c. $388,210.d. $384,761.e. none of the aboveANS: ESOLUTION:1. Need to invest £190,476 (£200,000/1.05) = £190,476.2. Need to exchange $384,762 to obtain the £190,476 (£190,476 ⨯ $2.02) = $384,762.3. At the end of 180 days, need $400,152 to repay loan ($384,762 ⨯ 1.04) = $400,152.PTS: 113. Assume that Cooper Co. will not use its cash balances in a money market hedge. When decidingbetween a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.a. can; canb. can; cannotc. cannot; cand. cannot; cannotANS: B PTS: 114. Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro willdepreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:a. sell euros forward.b. purchase euro currency put options.c. purchase euro currency call options.d. purchase euros forward.e. remain unhedged.ANS: A PTS: 115. Spears Co. will receive SF1,000,000 in 30 days. Use the following information to determine the totaldollar amount received (after accounting for the option premium) if the firm purchases and exercises a put option:Exercise price = $.61Premium = $.02Spot rate = $.60Expected spot rate in 30 days = $.5630-day forward rate = $.62a. $630,000.b. $610,000.c. $600,000.d. $590,000.e. $580,000.ANS: DSOLUTION: ($.61 - $.02) ⨯ SF1,000,000 = $590,000PTS: 116. A ____ involves an exchange of currencies between two parties, with a promise to re-exchangecurrencies at a specified exchange rate and future date.a. long-term forward contractb. currency option contractc. parallel loand. money market hedgeANS: C PTS: 117. If interest rate parity exists and transactions costs are zero, the hedging of payables in euros with aforward hedge will ____.a. have the same result as a call option hedge on payablesb. have the same result as a put option hedge on payablesc. have the same result as a money market hedge on payablesd. require more dollars than a money market hedgee. A and DANS: C PTS: 118. Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interestrates:U.S. Switzerland360-day borrowing rate 7% 5%360-day deposit rate 6% 4%Assume the forward rate of the Swiss franc is $.50 and the spot rate of the Swiss franc is $.48. IfParker Company uses a money market hedge, it will receive ____ in 360 days.a. $101,904b. $101,923c. $98,769d. $96,914e. $92,307ANS: DSOLUTION:1. Borrow SF190,476 (SF200,000/1.05) = SF190,476.2. Convert SF190,476 to $91,428 (SF190,476 ⨯ $.48) = $91,428.3. Invest $91,428 at 6% to accumulate $96,914 ($91,428 ⨯ 1.06) = $96,914.PTS: 119. The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The followinginterest rates exist:U.S. Switzerland360-day borrowing rate 7% 5%360-day deposit rate 6% 4%You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is:a. $101,904.b. $101,923.c. $98,770.d. $96,914.e. $92,307.ANS: CSOLUTION:1. Need to invest SF192,308 (SF200,000/1.04) = SF192,308.2. Need to borrow $92,308 to exchange for SF192,308 (SF192,308 ⨯ $.48) = $92,308.3. At the end of 360 days, need $98,769 to repay the loan ($92,308 ⨯ 1.07) = $98,770.PTS: 120. Your company will receive C$600,000 in 90 days. The 90-day forward rate in the Canadian dollar is$.80. If you use a forward hedge, you will:a. receive $750,000 today.b. receive $750,000 in 90 days.c. pay $750,000 in 90 days.d. receive $480,000 today.e. receive $480,000 in 90 days.ANS: ESOLUTION: C$600,000 ⨯ $0.80 = $480,000PTS: 121. A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and apremium 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.a. $1,169,000.b. $1,099,000.c. $1,106,000.d. $1,143,100.e. $1,134,000.ANS: CSOLUTION: ($1.60 - $.02) ⨯ £700,000 = $1,106,000PTS: 122. Assume that Smith Corporation will need to purchase 200,000 British pounds in 90 days. A call optionexists 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.a. $360,000.b. $338,000.c. $332,000.d. $336,000.e. $344,000.ANS: ESOLUTION: ($1.68 + $.04) ⨯ £200,000 = $344,000PTS: 123. Assume that Kramer Co. will receive SF800,000 in 90 days. Today's spot rate of the Swiss franc is$.62, and the 90-day forward rate is $.635. Kramer has developed the following probabilitydistribution for the spot rate in 90 days:$.64 40%$.65 30%The probability that the forward hedge will result in more dollars received than not hedging is:a. 10%.b. 20%.c. 30%.d. 50%.e. 70%.ANS: CSOLUTION: The forward hedge will result in more dollars if the spot rate is less than theforward rate, which is true in the first two cases.PTS: 124. Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Today's spotrate of the S$ is $.50, and the 180-day forward rate is $.53. A call option on S$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day expiration date. A put option on S$ exists, with an exercise price of $.51, a premium of $.02, and a 180-day expiration date. Jones has developed the following probability distribution for the spot rate in 180 days:Possible Spot Ratein 90 Days Probability$.48 10%$.53 60%$.55 30%The probability that the forward hedge will result in a higher payment than the options hedge is ____ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).a. 0%b. 10%c. 30%d. 40%e. 70%ANS: BSOLUTION: There is a 10% probability that the call option will not be exercised. In thatcase, Jones will pay $.48 ⨯ S$100,000 = $48,000, which is less than theamount paid with the forward hedge ($.53 ⨯ S$100,000 = $53,000).PTS: 125. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spotrate 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 $.02, and a 180-day expiration date. Patton Co. hasdeveloped the following probability distribution for the spot rate in 180 days:$.55 30%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).a. 10%b. 30%c. 40%d. 70%e. none of the aboveANS: DSOLUTION: The put option will be exercised in the first two cases, resulting in an amountreceived per unit of $.51 - $.02 = $.49. Thus, the forward hedge will result inmore U.S. dollars received ($.51 per unit).PTS: 126. The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.a. indexb. futuresc. forwardd. money markete. currency optionANS: A PTS: 127. Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. Forthe next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is $.23. Furthermore, Money's financial center has indicated that the possiblevalues of the Malaysian ringgit at the end of next month are $.20 and $.25, with probabilities of .30 and .70, respectively. Based on this information, the revenue from hedging minus the revenue from not hedging receivables is____.a. $0.b. -$7,500.c. $7,500.d. none of the aboveANS: CSOLUTION: RCH(1) = (MYR1,500,000 ⨯ $0.20) - (MYR1,500,000 ⨯ $0.23)= -$45,000RCH(2) = (MYR1,500,000 ⨯ $0.25) - (MYR1,500,000 ⨯ $0.23)= $30,000E[RCH] = (.30)(-45,000) + (.7)(30,000) = 7,5000PTS: 128. Hanson Corp. frequently uses a forward hedge to hedge its British pound (£) payables. For the nextquarter, Hanson has identified its net exposure to the pound as being £1,000,000. The 90-day forward rate is $1.50. Furthermore, Hanson's financial center has indicated that the possible values of theBritish pound at the end of next quarter are $1.57 and $1.59, with probabilities of .50 and .50,respectively. Based on this information, what is the expected real cost of hedging payables?a. $80,000.b. -$80,000.c. $1,570,000.d. $1,580,000.ANS: BSOLUTION: RCH(1) = (£1,000,000 ⨯ $1.50) - (£1,000,000 ⨯ $1.57) = -$70,000RCH(2) = (£1,000,000 ⨯ $1.50) - (£1,000,000 ⨯ $1.59) = -$90,000E[RCH] = (.50)(-70,000) + (.50)(-$90,000) = -$80,000PTS: 1Exhibit 11-1U.S. Jordan360-day borrowing rate 6% 5%360-day deposit rate 5% 4%29. Refer to Exhibit 11-1. Perkins Corp. will receive 250,000 Jordanian dinar (JOD) in 360 days. Thecurrent 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)?a. $377,115.b. $373,558.c. $363,019.d. $370,000.ANS: DSOLUTION:1. Borrow JOD238,095.24 (JOD250,000/1.05) = JOD238,095.24.2. Convert JOD238,095.24 to $352,380.95 (JOD238,095.24 ⨯ $1.48) = $352,380.95.3. Invest $352,380.95 at 5% to accumulate $370,000 ($352,280.95 ⨯ 1.05) = $370,000.PTS: 130. Refer to Exhibit 11-1. Pablo Corp. will need 150,000 Jordanian dinar (JOD) in 360 days. The currentspot rate of the dinar is $1.48, while the 360-day forward rate is $1.46. What is Pablo's cost fromimplementing a money market hedge (assume Pablo does not have any excess cash)?a. $224,135.b. $226,269.c. $224,114.d. $223,212.ANS: BSOLUTION:1. Need to invest JOD144,230.76 (JOD150,000/1.04) = JOD144,230.76.2. Need to convert $213,461.52 to obtain the JOD144,230.76 dinar (JOD144,230.76 ⨯ $1.48)= $213,461.52.3. At the end of 360 days, need $226,269.22 ($213,461.52 ⨯ 1.06) = $226,269.21.PTS: 131. Lorre Company needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether ornot to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar:Possible Value ofCanadian Dollar in 90 Days Probability$0.54 15%0.57 25%0.58 35%0.59 25%The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of the Canadian dollar in 90 days is $.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging?a. 40%.b. 60%.c. 15%.d. 85%.ANS: ASOLUTION: Since Lorre locks into the $.575 with a forward contract, the first two caseswould have been cheaper had Lorre not hedged (15% + 25% = 40%).PTS: 132. Quasik Corporation will be receiving 300,000 Canadian dollars (C$) in 90 days. Currently, a 90-daycall option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. Quasik plans to purchase options to hedge its receivable position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge?a. $219,000.b. $222,000.c. $216,000.d. $213,000.ANS: CSOLUTION: ($.73 - $.01) ⨯ 300,000 = $216,000.PTS: 133. FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position.Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also,a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans topurchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost?a. $144,000.b. $148,000.c. $152,000.d. $150,000.ANS: ASOLUTION: ($.71 + $.01) 200,000 = $144,000. Note: the call option is not exercisedsince the spot rate is less than the exercise price.PTS: 134. You are the treasurer of Arizona Corporation and must decide how to hedge (if at all) futurereceivables of 350,000 Australian dollars (A$) 180 days from now. Put options are available for a premium of $.02 per unit and an exercise price of $.50 per Australian dollar. The forecasted spot rate of the Australian dollar in 180 days is:Future Spot Rate Probability$.46 20%$.48 30%$.52 50%The 90-day forward rate of the Australian dollar is $.50.What is the probability that the put option will be exercised (assuming Arizona purchased it)?a. 0%.b. 80%.c. 50%.d. none of the aboveANS: CSOLUTION: Arizona will exercise when the exercise price is greater than the future spot(20% + 30% = 50%).PTS: 135. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield thesame result as the ____ hedge.a. put optionb. forwardc. call optiond. none of the aboveANS: B PTS: 136. Which of the following is the least effective way of hedging exposure in the long run?a. long-term forward contract.b. currency swap.c. parallel loan.d. money market hedge.ANS: D PTS: 137. When a perfect hedge is not available to eliminate transaction exposure, the firm may considermethods to at least reduce exposure, such as ____.a. leadingb. laggingc. cross-hedgingd. currency diversificatione. all of the aboveANS: E PTS: 138. Sometimes the overall performance of an MNC may already be insulated by offsetting effects betweensubsidiaries and it may not be necessary to hedge the position of each individual subsidiary.a. Trueb. FalseANS: T PTS: 139. To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency.a. receivable; purchaseb. payable; sellc. payable; purchased. none of the aboveANS: C PTS: 140. A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts arecommonly used for ____ transactions.a. forward; smallb. futures; largec. forward; larged. none of the aboveANS: C PTS: 141. Celine Co. will need €500,000 in 90 days to pay for German imports. Today's 90-day forward rate ofthe euro is $1.07. There is a 40 percent chance that the spot rate of the euro in 90 days will be $1.02, and a 60 percent chance that the spot rate of the euro in 90 days will be $1.09. Based on thisinformation, the expected value of the real cost of hedging payables is $____.a. -35,000b. 25,000c. -1,000d. 1,000ANS: DSOLUTION: E[RCH p] = -$35,000 ⨯ 0.40 + $25,000 ⨯ 0.60 = $1,000PTS: 142. In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost ofhedging payables will be:a. highly positive.b. highly negative.c. zero.d. none of the aboveANS: C PTS: 143. If an MNC is hedging various currencies, it should measure the real cost of hedging in each currencyas a dollar amount for comparison purposes.a. Trueb. FalseANS: F PTS: 144. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a German security.The current spot rate for the euro is $1.00. Samson can borrow funds in the U.S. at an annualizedinterest rate of 6 percent. If Samson uses a money market hedge, how much should it borrow in the U.S.?a. $952,381.b. $995,851.c. $943,396.d. $995,025.ANS: BSOLUTION: 1,000,000/[1 + (5% ⨯ 30/360) = $995,851PTS: 145. Blake Inc. needs €1,000,000 in 30 days. It can earn 5 percent annualized on a Ge rman security. Thecurrent spot rate for the euro is $1.00. Blake can borrow funds in the U.S. at an annualized interest rate of 6 percent. If Blake uses a money market hedge to hedge the payable, what is the cost ofimplementing the hedge?a. $1,000,000.b. $1,055,602.c. $1,000,830.d. $1,045,644.ANS: CSOLUTION:1. Borrow $995,851 from a U.S. bank (€1,000,000 ⨯ $1.00 ⨯ [1 + (.05 ⨯ 30/360)]2. Convert $995,851 to €995,851, given the exchange rate of $1.00 per euro.3. Use the euros to purchase a German security that offers 0.42% interest over 30 days.4. Repay the U.S. loan in 30 days, plus interest; the amount owed is $1,000,830 (computed as$995,851 ⨯ [1 + (.06 ⨯ 30/360)]).PTS: 146. Since the results of both a money market hedge and a forward hedge are known beforehand, an MNCcan implement the one that is more feasible.a. Trueb. FalseANS: T PTS: 147. If interest rate parity exists, the forward hedge will always outperform the money market hedge.a. Trueb. FalseANS: F PTS: 148. To hedge a contingent exposure, in which an MNC's exposure is contingent on a specific eventoccurring, the appropriate hedge would be a(n) ____ hedge.a. money marketb. futuresc. forwardd. optionsANS: D PTS: 149. A ____ is not normally used for hedging long-term transaction exposure.a. long-term forward contactb. futures contractc. currency swapd. parallel loanANS: B PTS: 150. The ____ does not represent an obligation.a. long-term forward contractb. currency swapc. parallel loand. currency optionANS: D PTS: 151. Hedging the position of individual subsidiaries is generally necessary, even if the overall performanceof the MNC is already insulated by the offsetting positions between subsidiaries.a. Trueb. FalseANS: F PTS: 152. If an MNC is extremely risk-averse, it may decide to hedge even though its hedging analysis indicatesthat remaining unhedged will probably be less costly than hedging.a. Trueb. FalseANS: T PTS: 153. A money market hedge involves taking a money market position to cover a future payables orreceivables position.a. Trueb. FalseANS: T PTS: 154. To hedge a payable position with a currency option hedge, an MNC would write a call option.a. Trueb. FalseANS: F PTS: 155. MNCs generally do not need to hedge because shareholders can hedge their own risk.a. Trueb. FalseANS: F PTS: 156. Currency futures are very similar to forward contracts, except that they are standardized and are moreappropriate for firms that prefer to hedge in smaller amounts.a. Trueb. FalseANS: T PTS: 157. To hedge payables with futures, an MNC would sell futures; to hedge receivables with futures, anMNC would buy futures.a. Trueb. FalseANS: F PTS: 158. When the real cost of hedging is positive, this implies that hedging was more favorable than nothedging.a. Trueb. FalseANS: F PTS: 159. A futures hedge involves taking a money market position to cover a future payables or receivablesposition.a. Trueb. FalseANS: F PTS: 160. If interest rate parity (IRP) exists, then the money market hedge will yield the same result as theoptions hedge.a. Trueb. FalseANS: F PTS: 161. The price at which a currency put option allows the holder to sell a currency is called the settlementprice.a. Trueb. FalseANS: F PTS: 162. A put option essentially represents two swaps of currencies, one swap at the inception of the loancontract and another swap at a specified date in the future.a. Trueb. FalseANS: F PTS: 163. The hedging of a foreign currency for which no forward contract is available with a highly correlatedcurrency for which a forward contract is available is referred to as cross-hedging.a. Trueb. FalseANS: T PTS: 164. The exact cost of hedging with call options (as measured in the text) is not known with certainty at thetime that the options are purchased.a. Trueb. FalseANS: T PTS: 165. The tradeoff when considering alternative call options to hedge a currency position is that an MNC canobtain a call option with a higher exercise price, but would have to pay a higher premium.a. Trueb. FalseANS: F PTS: 166. When comparing the forward hedge to the options hedge, the MNC can easily determine which hedgeis more desirable, because the cost of each hedge can be determined with certainty.a. Trueb. FalseANS: F PTS: 167. When comparing the forward hedge to the money market hedge, the MNC can easily determine whichhedge is more desirable, because the cost of each hedge can be determined with certainty.a. Trueb. FalseANS: T PTS: 168. Assume zero transaction costs. If the 90-day forward rate of the euro underestimates the spot rate 90days from now, then the real cost of hedging payables will be:a. positive.b. negative.c. positive if the forward rate exhibits a premium, and negative if the forward rate exhibits adiscount.d. zero.ANS: B PTS: 169. Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that euro is going toappreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:a. sell euros forwardb. purchase euro currency put options.c. purchase euro currency call options.d. purchase euros forward.e. remain unhedged.ANS: D PTS: 1。
V. Answers to End of Chapter Questions1. Achieving a balance-of-payments surplus requires that the sum of the capitalaccount balance and current account balance is positive, which requires a higher interest rate to attract greater capital inflows and lower real income to dampen import spending. Consequently, the BP schedule would lie above and to the left of the position it otherwise would have occupied if the external-balanceobjective were to ensure only a balance-of- payments equilibrium. Undoubtedly, if the central bank felt pressure to sterilize under the latter objective, the pressure to do so would be greater if it seeks to attain a balance-of-payments surplus, which would require the central bank to steadily acquire foreign-exchangereserves. In the absence of sterilization, the nation's money stock would steadily decline.2. In this situation, variations in the domestic interest rate relative to interest rates inother nations would have not effect on the nation's capital account balance and its balance of payments. Its BP schedule, therefore, would be vertical. Anexpansionary fiscal policy, given a fixed exchange rate (as assumed in thischapter), would cause the IS schedule to shift rightward, initially inducing a rise in equilibrium real income. This, however, would cause import spending toincrease, and the nation would experience a balance-of-payments deficit, which would place downward pressure on the value of its currency. To prevent achange in the exchange rate, the central bank would have to sell foreign exchange reserves. If this intervention is unsterilized, then the nation's money stock would decline, ultimately causing the LM schedule to shift back too a final IS-LMequilibrium at a point vertically above the initial equilibrium point, along thevertical BP schedule.3. A reduction in the quantity of money shifts the LM schedule leftward. At thenew IS-LM equilibrium, the nominal interest rate rises and real income declines.Irrespective of the shape of the BP schedule, this would result in a balance ofpayment surplus, which would tend to place upward pressure on the value of the nation's currency. To maintain a fixed exchange rate, the central bank would have to purchase foreign exchange reserves. If this foreign-exchange-market intervention is unsterilized, then the nation's money stock increases, causing the LM schedule to shift back to the right. Ultimately, the original IS-LMequilibrium is re-attained.4. If capital is highly mobile, a drop in government spending will likely cause aprivate payments deficit. The fall in income will cause a decrease in imports anda trade surplus. As the domestic interest rate increases, however, the capitaloutflow will lead to a private payments deficit. If capital is not mobile, thecapital outflows are likely not large enough to counteract the effect of a drop in imports. Therefore, a private payments surplus would result.5. A contractionary fiscal policy action, such as a reduction in government spending,causes the IS schedule to shift leftward, inducing an initial decline in the nominal interest rate and reduction in real income. As a result, there is a capital outflow and fall in import spending. Because capital is highly mobile, thecapital-outflow effect dominates, and the nation experiences abalance-of-payments deficit. This places downward pressure on the value of the nation's currency, which induces the central bank to sell foreign exchange reserves.If this action is unsterilized, then the nation's money stock declines, causing the LM schedule to shift back to the left was well, which yields a new IS-LMequilibrium along the BP schedule to the left of the original equilibrium point.6. If, on the other hand, there is low capital mobility, the nation experiences abalance-of-payments surplus. This places upward pressure on the value of the nation's currency, which induces the central bank to purchase foreign exchange reserves. If this action is unsterilized, then the nation's money stock rises,causing the LM schedule to shift to the right.7. A foreign fiscal contraction leads to the foreign IS schedule to shift to the left,resulting in a lower y* and r*. Financial resources will flow from the foreign country to the domestic country, placing pressure on the domestic currency to gain value. In response, therefore, the domestic central bank purchases foreignexchange to maintain the fixed exchange rate. Consequently, the domesticmoney supply rises, leading the domestic country's LM schedule to shift rightward.The lower foreign income level also leads to lower domestic exports (few foreign imports). Therefore, the domestic country's IS schedule shifts left and theforeign country's IS schedule shifts to the right. In both countries' graphs, the BP schedule shifts down to reflect lower interest rates.8. A domestic fiscal contraction leads to a leftward shift in the domestic ISschedule, resulting in a lower domestic income level and interest rate.Consequently, domestic imports fall (foreign exports fall). Further, as foreign exports fall, the foreign IS schedule shifts left and decreases foreign income. In turn, domestic exports fall and domestic IS schedule shifts further left. Thelower domestic interest rate leads to a capital outflow of the domestic country and puts pressure on the value of the domestic currency to fall. The domestic central bank responds by selling foreign exchange in order to maintain the fixed exchange rate. As the domestic money supply falls, the domestic LM schedule shifts to the left. Finally, both countries' BP lines shift down to the new lower equilibrium interest rate.9. A domestic monetary expansion shifts the domestic LM schedule rightward,which reduces the domestic interest rate. This tends to induce a domesticbalance-of-payments deficit and places downward pressure on the value of thedomestic currency relative to the foreign currency. Now, both central banks work together to keep the exchange rate unchanged, so the foreign central bank must increase its own money stock, shifting its LM schedule to the right and reducing the equilibrium foreign interest rate as well. In the end, therefore, both BP schedules shift downward, and the nations' interest rates are equalized, sopayments imbalances are eliminated. Equilibrium real income rises in bothnations, so there is a locomotive effect on the foreign country as a result of the domestic monetary expansion, assuming unchanging price levels.10. A domestic fiscal expansion causes the domestic IS schedule to shift to the right, which raises the domestic interest rate. This tends to induce a domesticbalance-of-payments surplus and places upward pressure on the value of the domestic currency relative to the foreign currency. Both central banks work together to keep the exchange rate fixed, so the foreign central bank must reduce its own money stock, shifting its LM schedule leftward and increasing the foreign interest rate as well. In the end, both BP schedules shift upward, and the nations' interest rates are equalized, so payments imbalances are eliminated. Equilibrium real income rises in the domestic country but declines in the foreign country. Thus, there is abeggar-thy-neighbor effect on the foreign country as a result of the domestic fiscal expansion, assuming unchanging price levels.。
Suggested answers to questions and problems（in the textbook）Chapter 22. Disagree, at least as a general statement。
One meaning of a current accountsurplus is that the country is exporting more goods and services than it isimporting. One might easily judge that this is not good-the country is producing goods and services that are exported, but the country is not at the same timegetting the imports of goods and services that would allow it do moreconsumption and domestic investment. In this way a current account deficitmight be considered good—the extra imports allow the country to consume and invest domestically more than the value of its current production。
Anothermeaning of a current account surplus is that the country is engaging in foreign financial investment—it is building up its claims on foreigners, and this adds to national wealth。
