1. Which of the following reflects a hedge of future receivables invoiced in GBP by a U.S. firm?
A) Purchase a currency call option in GBP.
B) Purchase GBP forward.
C) Borrow GBP, convert these funds to USD, invest these in USD assets with same maturity as the receivables.
D) Both (A) and (B) but not (C).
E) None of the above.
2. Which of the following reflects a hedge of future payables invoiced in GBP by a U.S. firm?
A) Purchase a currency call option in GBP.
B) Purchase GBP forward.
C) Borrow USD, convert these funds to GBP, invest these in GBP assets with same maturity as the payables.
D) All of the above
3. A domestic firm produces goods which compete in both the domestic and foreign markets with foreign produced substitutes. Appreciation of the domestic currency will likely:
A) Increase the firm’s domestic sales by reducing the competitiveness of foreign substitutes.
B) Increase the firm’s foreign sales.
C) Increase the firm’s cash outflows for foreign raw materials invoiced in foreign currencies.
D) Increase net returns earned on the firm’s foreign bank deposits.
E) none of the above.
4. Suppose that a US MNC holds JPY-denominated receivables totaling ¥500,000, due 12 months from today. If this MNC uses the money market hedge, then it can obtain a ______ cash flow of _____ or so a year later.
A) certain; $5,192
B) certain; $5,097
C) uncertain; $5,200
D) uncertain; $5,105
5. Suppose that a US MNC holds JPY-denominated receivables totaling ¥500,000, due 12 months from today, as in the above question. If the MNC uses the forward market hedge instead, then, ignoring the decimals:
A) it will obtain a certain USD cash flow equal to that based on the money market hedge.
B) it will obtain a certain USD cash flow greater than that based on the money market hedge.
C) it will obtain a certain USD cash flow less than that based on the money market hedge.
D) none of the above, because the USD cash flow remains subject to the future spot rate.