Alice Inc. imports manufactured goods from Ireland to the U.S. Aliceâ€™s revenues are primarily in US dollars and expenses are primarily in Euros. The CEO of Alice is concerned about her currency exposure over the next six months and is considering engaging in an option contract with Euros as the underlying asset (S). Which transaction would you recommend?a) Buy callsb) Buy putsc) Write callsd) Write putse) Options are unable to hedge Euro expenses

Alice Inc. imports manufactured goods from Ireland to the U.S. Aliceâ€™s revenues are primarily in US dollars and expenses are primarily in Euros. The CEO of Alice is concerned about her currency exposure over the next six months and is considering engaging in an option contract with Euros as the underlying asset (S). Which transaction would you recommend?a) Buy callsb) Buy putsc) Write callsd) Write putse) Options are unable to hedge Euro expenses

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 34QA

See similar textbooks

Similar questions

1. The following Information should be used for Questions 1 and 2. The treasurer of X wants to hedge an exposure to currency risk. X is a company whose domestic currency is the euro, and the company must make a payment of US $500 000 to a US supplier in 6 months' time. The following market rates are available: Exchange rates: $ per €1 Spot= 1.604 ± 0.002 6 months forward= 1.570 ± 0.004 6 month interest rates: Euro Borrowing= 4.8%. Euro Deposits= 4.4% US dollar Borrowing= 2.5%. US dollar Deposits= 2.0%. What would be the euro cost to X if he hedges through a forward contract? (a) Euro 326, 495 (b) Euro 319, 285 (c) Euro 313, 525 (d) Euro 333, 295 2. What would be the cost to X if he hedges through the money market? (a) USD 634, 631 (b) USD 631, 634 (c) Euro 316, 634 (d) Euro 316, 436
Al-Rawabi Company is an Omani firm offering different services. However, its main activity focuses on importing goods from Canada. Often, the firm pays its bills in CAD keeping part of its liabilities denominated in this currency. Suppose the spot rate 1 CAD = 0.3030 OMR and the 3-month forward %3D rate is CAD 3.2938/OMR. Specify the risk carried out by this firm. O a. No change in OMR valme O b. No change in CAD value O C. Appreciation of CAD O d. Appreciation of OMR
Please answer both subparts. 1. The following Information should be used for Questions 1 and 2. The treasurer of X wants to hedge an exposure to currency risk. X is a company whose domestic currency is the euro, and the company must make a payment of US $500 000 to a US supplier in 6 months' time. The following market rates are available: Exchange rates: $ per €1 Spot= 1.604 ± 0.002 6 months forward= 1.570 ± 0.004 6 month interest rates: Euro Borrowing= 4.8%. Euro Deposits= 4.4% US dollar Borrowing= 2.5%. US dollar Deposits= 2.0%. What would be the euro cost to X if he hedges through a forward contract? (a) Euro 326, 495 (b) Euro 319, 285 (c) Euro 313, 525 (d) Euro 333, 295 2. What would be the cost to X if he hedges through the money market? (a) USD 634, 631 (b) USD 631, 634 (c) Euro 316, 634 (d) Euro 316, 436
ABC Co. expects a payment from an American customer in 30 days. To hedge its currency exposure, ABC Co. shoulda. Sell dollars forward 30 days.b. Buy dollars forward 30 days.c. Sell pesos forward 30 days.d. Do nothing as there is no foreign exchange rate exposure for a 30 day time horizon.
You are the chief financial officer (CFO) of a manufacturing company. Your Japanese subsidiary has yen income. At the end of the year, this income will be converted to dollars and remitted to the home office (USA). Using options what strategies can you use to protect the value of this future remittance? а. buy a dollar call b. buy a yen call C. sell a dollar call d. none of the above
A multinational corporation based in the United States expects to receive a large payment in euros from its European client in six months. The corporation wants to hedge against potential depreciation of the euro. Which specific forward contract(s) could the company use to mitigate the currency risk? Select all that apply: Buy U.S. dollars forward against euros Sell U.S. dollars forward against euros Buy euros forward against U.S. dollars Sell euros forward against U.S. dollars
An Omani importer will receive commodities from USA and he has to pay an amount of USD 250,000 next month. Which of the below markets is well suited to offer hedging protection against this transactions risk exposure? a. Inflation rate market O b. Transactions market C. Spot market O d. Forward market
1. Rate at which a foreign exchange dealer converts one currency into another currency on a particular day with maximum settlement of 2 days. a. forward rate b. future forwards rate c. spot rate 2. Risk of losing a market due to forex change. a. economic risk b. market risk c. transaction risk 3. Which of the following is NOT true about private placement? a. A private placement need to be registered with SEC b. Pension funds, insurance companies are the usual investors of portfolio issued under private placement c. The company still need to disclose financial data to convince investors
Identify what transaction risk management is done in the following cases: (A) ABC Corporation will only accept P200,000 or its equivalent on the payment date despite having a USD4,000 sale. (B) ABC Corporation pays a foreign-currency denominated purchase early when it sees that the Philippine peso will decrease in value.a. Invoicing in home currency; Leadingb. Forward contract; Leadingc. Invoicing in home currency; Laggingd. Forward contract; Lagging
Scenario: Lima Tech Lima Tech is a developer of software for K-12 children. The company has operations in Germany and would like to expand its foreign operations with a new facility in India. If Lima Tech holds a currency option to purchase Euro at €1.05/$ in 30 days, at the end of which the exchange rate is €1.10/$, then Lima Tech would not exercise its currency option has succeeded in hedging against exchange rate risk O is required to follow through on a currency exchange would exercise its currency option
Brexylite plc is due to pay €1,750,000 to its European suppliers in 3 months’ time. The financial manager has decided to hedge the currency risk of this account payable. The following information has been provided by the company’s bank: Spot rate (£ per €): 1·1410 ± 0·0022 3 months forward rate (£ per €): 1·1574 ± 0·0041 6 months forward rate (£ per €) 1.1582 ± 0.0032 Calculate the expected (£) Stirling payment if the 3 months forward market is used
A U.S. firm, sells merchandise today to a British company for £100,000. The current exchange rate is $1.38/£, the account is payable in three months, and the firm chooses to hedge by borrowing £98,765.43 today and exchanging the proceeds today for dollars; the loan will be paid back with the £100,000 accounts receivable (money market hedge). If Husky converted the borrowed pounds into dollars today and invested that amount at its WACC of 6% (1.5% for 90 days), how much much money in U.S. dollars will Husky Sporting Goods Company have in 90 days?