Question 1 (1.5 points) Saved James Fly Corp., a US corporation, has a subsidiary in Germany. Suppose the euro depreciates relative to the U.S. dollar. This will cause James Fly's reported earnings (from the consolidated income statement) to --- be reduced. increase. remain unchanged. Question 2 (1.5 points) Saved The real cost of hedging payables with a forward contract equals: the nominal cost of hedging minus the nominal cost of not hedging. the nominal cost of not hedging minus the nominal cost of hedging. the nominal cost of hedging divided by the nominal cost of not hedging. the nominal cost of not hedging divided by the nominal cost of hedging. Question 3 (1.5 points) Ex-Amazon, based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. Ex-Amazon would ---- a stronger dollar. SH Question 3 (1.5 points) Ex-Amazon, based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. Ex-Amazon would a stronger dollar. ---- benefit from be unaffected by be adversely affected by Question 4 (1.5 points) Saved Which of the following is an example of economic exposure but not an example of transaction exposure? An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers. O An increase in the pound's value increases the U.S. firm's cost of British pound payables. O A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables. O A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank. Question 5 (1.5 points) Saved Question 5 (1.5 points) Saved If interest rate parity (IRP) exists and transactions costs are zero, the hedging of payables in euros with a forward hedge will have the same result as a call option hedge on payables have the same result as a put option hedge on payables have the same result as a money market hedge on payables require more dollars than a money market hedge Question 6 (1.5 points) Frank Farm does not have foreign subsidiaries. Frank Farm: is subject to all types of foreign exchange exposure. is not subject to economic exposure. is not subject to transaction exposure. is not subject to translation exposure. Question 7 (1.5 points) Which of the following reflects a hedge of net receivables on British pounds by a U.S. firm? 94 Question 9 (1.5 points) Great Illinois Corp. conducts business in Japan. Years ago, Great Illinois established a subsidiary in Japan that has consistently generated very large profits denominated in Japanese yen. Great Illinois wishes to restructure its operations to reduce economic exposure. Which of the following is not a feasible way of accomplishing this? increase Japanese supply orders. increase Japanese sales. DO O restructure debt to increase debt payments in Japan. reduce Japanese sales. Question 10 (1.5 points) Your company will receive a payment of C$400,000 in 90 days. The 90-day forward rate in the Canadian dollar is $1.15. If you use a forward hedge, you will: O sell forward C$400,000 and receive $460,000 today. O sell forward C$400,000 and receive $460,000 in 90 days. d pay $460,000 in 90 days. buy forward C$400,000 and pay $347,826 today. pay $347,826 in 90 days. e 9 Short Answer Questions Dell Corp. sold a computer system to a customer in the UK and billed 10 million receivable in 6 months. Dell would like to control for the exchange rate risk. The current spot exchange rate is $1.30/ and the 6-month forward exchange rate is $1.27/ at the moment. Dell can buy a 6-month put option on 10 million with a strike price of $1.32/ for a premium of $0.02 per pound. It can also buy a 6-month call option on 10 million with a strike price of $1.29/ for a premium of $0.15 per pound. Currently, 6-month interest rate is 6.1% per annum in the U.K. and 5.0% per annum in the U.S. Question 11 (2 points) Compute the guaranteed dollar proceeds from the sale if Dell decides to hedge using a forward contract. Format B I U A/ EQ Question 12 (2 points) If Dell decides to hedge using money market instruments, what action does Dell need to take? What would be the guaranteed dollar proceeds from the sale in this case? um 9 Question 12 (2 points) If Dell decides to hedge using money market instruments, what action does Dell need to take? What would be the guaranteed dollar proceeds from the sale in this case? Format V BI U - A Eg h Question 13 (2 points) If Dell decides to hedge using options on pounds, what option (put or call) will Dell use? And what would be the 'expected' dollar proceeds from the aircraft sale? Assume that Dell regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate. Format B I U - En e 1 949 Question 14 (2 points) Based on the available information and your calculations above, what is your recommendation to Dell for a best strategy (forward hedge vs money market hedge vs options hedge)? Why? Format V ... EQ h Question 15 (2 points) Other things being equal, at what forward rate would Dell be indifferent between the forward and money market hedge? Paragraph IU ... EQ um 949 A