可乐配方CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS五香鹰嘴豆
QUESTIONS
1. How would you define transaction exposure? How is it different from economic exposure?
Answer: Transaction exposure is the nsitivity of realized domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to unexpected changes in exchange rates. Unlike economic exposure, transaction exposure is well-defined and short-term.
2. Discuss and compare hedging transaction exposure using the forward contract vs. money market instruments. When do the alternative hedging approaches produce the same result?
Answer: Hedging transaction exposure by a forward contract is achieved by lling or buying foreign currency receivables or payables forward. On the other hand, money market hedge is achieved by borrowing or lending the prent value of foreign currency receivables or payables, thereby creating offtting foreign currency positions. If the interest rate parity is holding, the two hedging methods are equivalent.
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3. Discuss and compare the costs of hedging via the forward contract and the options contract.
Answer: There is no up-front cost of hedging by forward contracts. In the ca of options hedging, however, hedgers should pay the premiums for the contracts up-front. The cost of forward hedging, however, may be realized ex post when the hedger regrets his/her hedging decision.
4. What are the advantages of a currency options contract as a hedging tool compared with the forward contract?
Answer: The main advantage of using options contracts for hedging is that the hedger can decide whether to exerci options upon obrving the realized future exchange rate. Options thus provide a hedge against ex post regret that forward hedger might have to suffer. Hedgers can only eliminate the downside risk while retaining the upside potential.
5. Suppo your company has purchad a put option on the German mark to manage exchange exposure associated with an account receivable denominated in that currency. In this ca, your company can be said to have an ‘insurance’ policy on its receivable. Explain in what n this is so.
Answer: Your company in this ca knows in advance that it will receive a certain minimum dollar amount no matter what might happen to the $/€ exchange rate. Furthermore, if the German mark appreciates, your company will benefit from the rising euro.
6. Recent surveys of corporate exchange risk management practices indicate that many U.S. firms simply do not hedge. How would you explain this result?
Answer: There can be many possible reasons for this. First, many firms may feel that they are not really expod to exchange risk due to product diversification, diversified markets for their products, etc. Second, firms may be using lf-insurance against exchange risk. Third, firms may feel that shareholders can diversify exchange risk themlves, rendering corporate risk management unnecessary.
7. Should a firm hedge? Why or why not?
Answer: In a perfect capital market, firms may not need to hedge exchange risk. But firms can add to their value by hedging if markets are imperfect. First, if management knows about the firm’s exposure better than shareholders, the firm, not its shareholders, should hedge. Second, firms may be able to hedge at a lower cost. Third, if default costs are significant, corporate hedging can be justifiable becau it reduces the probability of default. Fourth, if the firm faces progressive taxes, it can reduce tax obligations by hedging which stabilizes corporate earnings.
8. Using an example, discuss the possible effect of hedging on a firm’s tax obligations.
感觉很累Answer: One can u an example similar to the one prented in the chapter.
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9. Explain contingent exposure and discuss the advantages of using currency options to manage this type of currency exposure.
Answer: Companies may encounter a situation where they may or may not face currency exposure. In this situation, companies need options, not obligations, to buy or ll a given amount of foreign exchange they may or may not receive or have to pay. If companies either hedge using forward contracts or do not hedge at all, they may face definite currency exposure.
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10. Explain cross-hedging and discuss the factors determining its effectiveness.
幼儿园卫生保健计划Answer: Cross-hedging involves hedging a position in one ast by taking a position in another ast. The effectiveness of cross-hedging would depend on the strength and stability of the relationship between the two asts.
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1. Cray Rearch sold a super computer to the Max Planck Institute in Germany on credit and invoiced €10 million payable in six months. Currently, the six-month forward exchange rate is $1.10/€ and the foreign exchange advisor for Cray Rearch predicts that the spot rate is likely to be $1.05/€ in six months.
