Question

You buy a 30 day put option on Swiss franc (CHF) to hedge an account receivable of CHF 800,000. The strike price is USD/CHF 0.96. Assuming a scenario where the spot USD/CHF in 30 days is 0.92, which of the following is true? Select one:

A. The decision to exercise the put or not depends on the size of the premium paid.

B. The put is ITM and should be exercised by the company.

C. The put is OTM and should not be exercised by the company.

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A firm with an existing fixed-rate debt that expects interest rates to decline and wants to take advantage of this market trend may engage in a an interest rate swap agreement to:

Select one:

A. Pay fixed rate interest in one currency and receive fixed rate in another currency.

B. Pay fixed-rate interest and receive floating rate interest

C. Pay fixed rate interest in one currency and receive floating rate in another currency

D. Pay floating rate interest and receive fixed rate interest.

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The objective of competitive (or operating/economic) exposure management is:

Select one:

A. to anticipate and manage the effect of unexpected changes in exchange rates on the firm's future cash flows.

B. to anticipate and manage the effect of unexpected changes in exchange rates on the firm's financial statement.

C. to maximize foreign exchange gains resulting from the settlement of the firm's outstanding obligations in foreign currency.

D. to eliminate foreign exchange losses resulting from the settlement of the firm's outstanding obligations in foreign currency.

Answer 1

1]

A put option should be exercised if the spot rate at expiration is lower than the option strike price. This iis because by exercising the option, the underlying asset can be sold at a price which is higher than the spot price.

B is the correct answer.

A is incorrect. The size of premium does not affect the decision to exercise

2]

D is the correct answer.

By choosing this swap, the firm can convert its fixed rate loan into a floating rate loan, and thus it will benefit if interest rates decline as expected

A and C are incorrect because the firm does not wish to swap its foreign currency payments