Question

Assume a U.S. firm has euro receivables for its German exports in 60 days. The firm...

Assume a U.S. firm has euro receivables for its German exports in 60 days. The firm expects the euro to appreciate, but it still wants to hedge its downside risk. What type of hedging is more appropriate in this situation?

A.           Purchase euro forward

B.           Purchase euro futures

C.           Purchase euro put option

D.           Purchase euro call option

If hedging eliminates risk but results in lower cash flow than not hedging, whether a firm hedges or not depends on:

A. the anticipated changes in the exchange rate.

B. the firm's ability to increase cash flow from other sources.

C. the firm's risk-aversion and the firm's reason for considering hedging.

D. the anticipated changes in the forward rate.

Interest rate swaps can be used for all of the following purposes except:

A.           to borrow at the prime rate

B.           to convert a fixed-rate loan into a floating-rate loan

C.           to convert a floating-rate loan into a fixed-rate loan

D.           to hedge interest rate risk

A currency swap without the exchange of notional amount is most likely to be used in what situation?

A.           a company issuing a bond

B.           a company arranging a loan

C.           a dealer trying to hedge a currency option

D.           a company generating cash flows in a foreign currency

Homework Answers

Answer #1

Q.1 Assume a U.S. firm has euro receivables for its German exports in 60 days. The firm expects the euro to appreciate, but it still wants to hedge its downside risk. What type of hedging is more appropriate in this situation?

B. Purchase euro futures

Q.2 If hedging eliminates risk but results in lower cash flow than not hedging, whether a firm hedges or not depends on:

D. the anticipated changes in the forward rate.

Q.3 Interest rate swaps can be used for all of the following purposes except

A. to borrow at the prime rate

Q.4 A currency swap without the exchange of notional amount is most likely to be used in what situation?

D. a company generating cash flows in a foreign currency

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