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Hedging Transaction - MCQ

1. Which of the following is the least effective way of hedging transaction exposure in the long
run?

a. long-term forward contract.
b. currency swap.
c. parallel loan.
d. money market hedge.

2. If interest rate parity exists and transactions costs are zero, the hedging of payables in
euros with a forward hedge will -

a. have the same result as a call option hedge on payables
b. have the same result as a put option hedge on payables
c. have the same result as a money market hedge on payables
d. require more dollars than a money market hedge
e. a and d

3. 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 b.

4. Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate
estimate of the spot rate 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 a
discount.
d. zero.

Solution Summary

This posting gives the answer key to 4 multiple choice questions based on Hedging Transactions

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