QUESTION 7

1. Lorre Co. needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar:

   Possible Value of
   Canadian 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.	15 percent
   	b.	60 percent
   	c.	40 percent
   	d.	85 percent

1.5 points

QUESTION 8

1. Quasik Corp. will be receiving 300,000 Canadian dollars (C$) in 90 days. 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. Quasik plans to purchase options to hedge its receivables position. Assuming that the spot rate in 90 days is $.71, what is the net amount received from the currency option hedge?

   	a.	$216,000
   	b.	$219,000
   	c.	$222,000
   	d.	$213,000

1.5 points

QUESTION 9

1. You are the treasurer of Arizona Corp. and must decide how to hedge (if at all) future receivables 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.	None of these are correct.
   	b.	80 percent
   	c.	0 percent
   	d.	50 percent