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Ch08 questions CHAPTER MANAGEMENT OF TRANSACTION EXPOSURE QUESTIONSHow would you de ?ne transaction exposure How is it di ?erent from economic exposure Discuss and compare hedging transaction exposure using the forward contract vs money market instruments

CHAPTER MANAGEMENT OF TRANSACTION EXPOSURE QUESTIONSHow would you de ?ne transaction exposure How is it di ?erent from economic exposure Discuss and compare hedging transaction exposure using the forward contract vs money market instruments When do the alternative hedging approaches produce the same result Discuss and compare the costs of hedging via the forward contract and the options contract What are the advantages of a currency options contract as a hedging tool compared with the forward contract Suppose your company has purchased a put option on the euro to manage exchange exposure associated with an account receivable denominated in that currency In this case your company can be said to have an ? insurance ? policy on its receivable Explain in what sense this is so Recent surveys of corporate exchange risk management practices indicate that many U S ?rms simply do not hedge How would you explain this result Should a ?rm hedge Why or why not Explain contingent exposure and discuss the advantages of using currency options to manage this type of currency exposure Explain cross-hedging and discuss the factors determining its e ?ectiveness PROBLEMS You plan to visit Geneva Switzerland in three months to attend an international business conference You expect to incur the total cost of SF for lodging meals and transportation during your stay As of today the spot exchange rate is SF and the three-month forward Crate is SF You can buy the three-month call option on SF with the exercise rate of SF for the premium of per SF Assume that your expected future spot exchange rate is the same as the forward rate The three-month interest rate is percent per annum in the United States and percent per annum in Switzerland a Calculate your expected dollar cost of buying SF if you choose to hedge via call option on SF b Calculate the future dollar cost of meeting this SF obligation if you decide to hedge using a forward contract c At what future spot exchange rate will you be indi ?erent between the forward and option market hedges d Illustrate the future dollar costs of meeting the SF payable against the future spot exchange rate under both the options and forward market hedges Cruise Company PCC purchased a ship from Mitsubishi Heavy Industry PCC owes Mitsubishi Heavy Industry million yen in one year The current spot rate is yen per dollar and the one-year forward rate is yen per dollar The annual interest rate is in Japan and in the U S PCC can also buy a one-year call option on yen at the strike price of per yen for a premium of US cents per yen in other words see it as a basis point of a Compute the future dollar costs of meeting this obligation using the money market hedge and the forward hedges b Assuming that the forward exchange rate is the best predictor of the future spot rate compute the expected future dollar cost of meeting this