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Futures, options, currencies, hedges, exchange rate risk

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I need help in answering the questions below.

Please provide your answers on the Excel Answer Template attached.

1. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of ?200,000 in three months. On June1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell ?200,000 forward in three months.The spot rate of the euro on September 1 is $1.15. Graylon will receive $_________ for the euros.

A) 224,000
B) 220,000
C) 200,000
D) 230,000

2. Forward contracts:
A) contain a commitment to the owner, and are standardized.
B) contain a commitment to the owner, and can be tailored to the desire of the owner.
C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D) contain a right but not a commitment to the owner, and are standardized.

3. Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
A) purchase a call option on francs.
B) obtain a forward contract to purchase francs forward.
C) sell a futures contract on francs.
D) all of the above are appropriate strategies for the scenario described.

4. If your firm expects the euro to substantially depreciate, it could speculate by _______ euro call options or _______ euros forward in the forward exchange market.
A) selling; selling
B) selling; purchasing
C) purchasing; purchasing
D) purchasing; selling

5. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is:
A) $1,562.50.
B) -$1,562.50.
C) -$1,250.00.
D) -$625.00.

6. Which of the following is true?
A) The futures market is primarily used by speculators while the forward market is primarily used for hedging.
B) The futures market is primarily used for hedging while the forward market is primarily used for speculating.
C) The futures market and the forward market are primarily used for speculating.
D) The futures market and the forward market are primarily used for hedging.

7. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by:
A) selling futures in francs.
B) buying futures in francs.
C) buying franc put options.
D) buying franc call options.

8. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?
A) $6,875,000.
B) $7,250,000.
C) $7,000,000.
D) $6,500,000.
E) none of the above

9. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exer¬cise price is $.81. The option will be exercised on the expiration date, if at all. If the spot rate on the expira¬tion date is $.87, the profit as a percent of the initial invest¬ment (the premium paid) is:
A) 0 percent.
B) 25 percent.
C) 50 percent.
D) 150 percent.
E) none of the above

10. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could _______ to hedge the exchange rate risk on those exports.
A) sell yen put options
B) buy yen call options
C) buy futures contracts on yen
D) sell futures contracts on yen

11. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?
A) $74,000.
B) $84,000.
C) $75,000.
D) $85,000.

12. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the baht's closing exchange rate (in $) quoted by Thailand's central bank in 90 days. The baht's spot rate today is $.02. If the rate quoted by Thailand's central bank on August 1 is $.022, Johnson will ________ $__________.
A) pay; 20,000
B) be paid; 20,000
C) pay; 2,000
D) be paid; 2,000
E) none of the above

13. Which of the following are true regarding the options markets?
A) Hedgers and speculators both attempt to lower risk.
B) Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
C) Hedgers and speculators are both necessary in order for the market to be liquid.
D) all of the above

14. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?
A) $44,500.
B) $45,000.
C) $526 million.
D) $47,500.

The following is not a multiple choice question and will require you to provide your answer using the table provided in the excel answer template.

15. Assume that the transactions listed below are anticipated by U.S. firms that have no other foreign transactions. In the excel file, place an "X" in the yellow boxes contained in the table wherever you see possible ways to hedge each of the transactions (some transactions/lines will have more than one "X' per line).

a. Georgetown Co. plans to purchase Japanese goods denominated in yen.
b. Harvard, Inc., sold goods to Japan, denominated in yen.
c. Yale Corp. has a subsidiary in Australia that will be remitting funds to the U.S. parent.
d. Brown, Inc., needs to pay off existing loans that are denominated in Canadian dollars.
e. Princeton Co. may purchase a company in Japan in the near future (but the deal may not go through).

Forward Contract Futures Contract Options Contract
Trans- Forward Forward Buy Sell Purchase Purchase
action Purchase Sale Futures Futures Calls Puts
a.
b.
c.
d.
e.

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https://brainmass.com/business/foreign-exchange-rates/futures-options-currencies-hedges-exchange-rate-risk-191371

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Please see attached file.

1.  Graylon, Inc., based in Washington, exports products to a German firm and will receive  payment of ?200,000 in three months. On June1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell ?200,000 forward in three months.The spot rate of the euroon September 1 is $1.15. Graylon will receive $_________ for the euros.

A) 224,000
B) 220,000
C) 200,000
D) 230,000

Answer: B) 220,000
Amount received= 200,000 x 1.10= $220,000
Since the price of Euro is locked in by the forward contract

2. Forward contracts:
A) contain a commitment to the owner, and are standardized.
B) contain a commitment to the owner, and can be tailored to the desire of the owner.
C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D) contain a right but not a commitment to the owner, and are standardized.

Answer: B) contain a commitment to the owner, and can be tailored to the desire of the owner.
Forward contracts are tailor made; there is a commitment in the forward contract to buy/sell the underlying asset

3. Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
A) purchase a call option on francs.
B) obtain a forward contract to purchase francs forward.
C) sell a futures contract on francs.
D) all of the above are appropriate strategies for the scenario described.

Answer: C) sell a futures contract on francs.

The firm would be purchasing Swiss francs. Selling a futures contract on francs would mean SELLING francs.

4. If your firm expects the euro to substantially depreciate, it could speculate by _______ euro call options or _______ euros forward in the forward exchange market.

A) selling; selling
B) selling; purchasing
C) purchasing; purchasing
D) purchasing; selling

Answer: A) selling; selling
A cuurency that is depreciating substantially will have to be sold- sell call options, sell forward contract

5. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit.  A pound option represents 31,250 units.  Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date.  The highest net profit possible for the speculator based on the information above is:
A) $1,562.50.
B) -$1,562.50.
C) -$1,250.00.
D) ...

Solution Summary

Answer to Multiple choice questions on Derivatives, futures, options, currencies, hedges, exchange rate risk.

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Similar Posting

Strategies in Addressing Foreign Exchange Risk :

Businesses and governments adopt various strategies to minimise or take advantage of Foreign Exchange fluctuations. It is very important since the volume of transactions are huge involving millions of US dollars. The fluctuation of currency of one country in terms of dollars decides the amount of payment or receipts are to be made or received.

Discuss types of foreign exchange risk and strategies to address them.

The types of risks may be enumerated as follows:-

i) Transaction risk;
ii) Economic risk;
iii) Translation risk.

Hedging transaction risk - the internal techniques:
1) Invoice in home currency;
2) Leading and lagging;
3) Matching
4) Decide to do nothing;

Hedging transaction risk - the external techniques:
a) Forward contracts;
b) Money market hedges;
c) Future contracts;
d) Options;
e) Forex swaps; and
f) Currency swaps.

Strategies:

Hedging transaction risk - the internal techniques;

Invoice home currency: an easy way is that company insists its foreign customer pay in the company's home currency and likewise the company will pay for all for imports in home currency. But it does not eliminate the exchange rate risk. It has simply been passed on to customers. The adverse effect of it is that the customers may not be too happy and start looking for an alternative supplier.

However the exchange-rate risk has not gone away, it has just been passed onto the customer. Your customer may not be too happy with your strategy and simply look for an alternative supplier.

Leading and lagging: If an importing company foresees that currency in which the payment is to be made may depreciate it may delay in the payment with the consent of the customer/exporter or by extending the terms of the credit. Conversely if the exporter anticipates the currency is likely to depreciate over a period of time it may try to obtain the payment early by extending a discount.
Here the problem arises in guessing which way the movement of the rate will take place.

Matching: if the company's receipts and payment are due in the same currency and at the same time, it can easily match them against each other. Then there remains the problem of unmatched portion of the total transaction necessitating dealing on the Forex markets. One way to overcome this problem is to have a foreign currency account with a bank.
Decide to do nothing: in such situation the company will win or lose some. Theoretically the gains and losses let off to leave a similar result like that of hedged.

While in the short term the losses may be substantial, the additional advantage may be by way of saving in transaction costs.

Hedging transaction risk - the external techniques:
Forward contracts: The forward market is where a firm can buy and sell a currency, at a fixed future date at a predetermined rate, i.e. the forward rate of exchange. This effectively fixes the future rate.
Money market hedges: Here the company deposits/borrows the foreign currency till the date the actual transaction takes place avoiding the uncertainty of the future exchange rate by making the exchange at today's rate.

Futures contracts - The purpose of the future contract is to fix and exchange rate at some future date depending on the basic risk. The future contracts are traded in hedging instruments of standard size.

Options: An option is a right without imposing any kind of obligation to buy or sell a currency at existing price on a future date. In the event of favorable movement in rates the company may allow the option to lapse to take advantage of favorable movement.
The right is exercised only when there is an adverse movement. The difference between call option and put option is that in the case of former the holder has the right to buy the underlying currency and in the latter the holder has a right to sell the underlying currency.
The options are more expensive than the forward contracts and futures.

Companies use options when the need to cover exposure is over a long period of time extending from six to twelve months.

Forex swaps: In Forex swaps the parties agree to swap equivalent amount of currency for a particular period and then re-swap them at the end of the period at an agreed swap rate. The rate of swap and the amount of currency is agreed in advance by the parties hence called a fixed rate or a fixed rate swap. The objective of the Forex swap is to hedge against Forex risk for longer period than on the forward market. Besides it enables access to capital markets from where it may be very difficult to borrow directly - almost impossible.

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