BOEING EXAM #3 REVIEW
QUESTIONS WITH VERIFIED
ANSWERS
A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail
strategies using options that will eliminate exchange rate risk.
Strike
Euro €62,500
¥125 = €1.00
Yen ¥1,250,000
€0.008 = ¥1.00 - Answer-Buy 16 put options on euro or buy 10 call options on yen
Which of the following statement is FALSE? - Answer-WRONG
If you owe a foreign currency denominated debt, you can hedge with buying the
foreign currency today and investing it in the foreign county.
The most direct and popular way of hedging transaction exposure is by currency
future contracts.
Which of the following statements make the best argument for why firms should NOT
hedge exchange rate risks? - Answer-WRONG
Exchange rate risk is irrelevant for multinational companies (MNCs) because an
MNC generates cash flows in numerous currencies. The exchange rate movements
of many currencies can easily, exactly offset each other.
Exchange rate risk is irrelevant because many multinational companies are similarly
affected by exchange rate movements.
Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the
following will hedge your liability? - Answer-All the strategies, executed correctly, will
hedge the FX risk.
(MMH_Importer, 2/4) A Boeing imported a Rolls-Royce jet engine for £5 million in
one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 =
$1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market
hedge? - Answer-Boeing buys British pounds in the spot market
A Japanese IMPORTER has a $1,250,000 PAYABLE due in one year. Detail a
strategy using forward contracts that will hedge his exchange rate risk.
Spot exchange rate
1-year forward rate
Contract size
$1.00 = ¥100
$1.00 = ¥120
¥12,500,000 - Answer-Go short in 12 yen forward contracts
(MMH-exporter, 2/4) Suppose that Boeing exported a Boeing 737 to British Airways
and billed £10 million payable in one year. The market conditions are given as
, follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a
correct step of a money market hedge? - Answer-Boeing buys US dollars in the spot
market
Your firm has a British customer who is willing to place a $1 million order, but wants
to pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the
one-year forward rate is $1.90 = £1.00. The lead time on the order is such that
payment is due in one year. What is the fairest exchange rate to use? - Answer-
$1.90 = £1.00
(MMH_Importer, 3/4) A Boeing imported a Rolls-Royce jet engine for £5 million in
one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 =
$1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market
hedge? - Answer-Boeing borrows $8,450,704.23 in the United States now
(MMH-exporter, 3/4) Suppose that Boeing exported a Boeing 737 to British Airways
and billed £10 million payable in one year. The market conditions are given as
follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a
correct step of a money market hedge? - Answer-Boeing lends $10,873,786.41 in
the United States now
(MMH-exporter, 1/4) Suppose that Boeing exported a Boeing 737 to British Airways
and billed £10 million payable in one year. The market conditions are given as
follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a
correct step of a money market hedge? - Answer-Boeing borrows £9,708,737.86 in
the United Kingdom at the prevailing interest rate of 3%
Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts) are
available on the London exchange in units of €10,000 with strike prices of £0.80 =
€1.00. Options (calls and puts) are available on the Frankfurt exchange in units of
£10,000 with strike prices of €1.25 = £1.00. How many call or put options should the
UK firm to hedge a €100,000 receivables? - Answer-both choices are correct
Boeing imported a Rolls-Royce jet engine for £5 million in one year. Which of the
following is true, given the market conditions of i$=6%, i£ = 6.5%, S0 = $1.80/£, F1 =
$1.75/£? - Answer-If Boeing decides to use a currency option contract to hedge its
pound payable, it should buy call option
Assume that Boeing exported a Boeing 737 to British Airways and billed £10 million
payable in one year. Assume i$=6.1%, i£ = 10.9%, S0 = $1.50/£, F1 = $1.46/£ and
S1= $1.60/£. By implementing this forward hedging strategy, Boeing
___________________. - Answer-lost $1.4 million
Which of the following statement is FALSE? - Answer-WRONG
If you owe a foreign currency denominated debt, you can hedge with buying the
foreign currency today and investing it in the foreign county.
The most direct and popular way of hedging transaction exposure is by currency
forward contracts.
If you own a foreign currency denominated bond, you can hedge with a swap
contract where pay the cash flows of the bond in exchange for dollars.
QUESTIONS WITH VERIFIED
ANSWERS
A Japanese EXPORTER has a €1,000,000 receivable due in one year. Detail
strategies using options that will eliminate exchange rate risk.
Strike
Euro €62,500
¥125 = €1.00
Yen ¥1,250,000
€0.008 = ¥1.00 - Answer-Buy 16 put options on euro or buy 10 call options on yen
Which of the following statement is FALSE? - Answer-WRONG
If you owe a foreign currency denominated debt, you can hedge with buying the
foreign currency today and investing it in the foreign county.
The most direct and popular way of hedging transaction exposure is by currency
future contracts.
Which of the following statements make the best argument for why firms should NOT
hedge exchange rate risks? - Answer-WRONG
Exchange rate risk is irrelevant for multinational companies (MNCs) because an
MNC generates cash flows in numerous currencies. The exchange rate movements
of many currencies can easily, exactly offset each other.
Exchange rate risk is irrelevant because many multinational companies are similarly
affected by exchange rate movements.
Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the
following will hedge your liability? - Answer-All the strategies, executed correctly, will
hedge the FX risk.
(MMH_Importer, 2/4) A Boeing imported a Rolls-Royce jet engine for £5 million in
one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 =
$1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market
hedge? - Answer-Boeing buys British pounds in the spot market
A Japanese IMPORTER has a $1,250,000 PAYABLE due in one year. Detail a
strategy using forward contracts that will hedge his exchange rate risk.
Spot exchange rate
1-year forward rate
Contract size
$1.00 = ¥100
$1.00 = ¥120
¥12,500,000 - Answer-Go short in 12 yen forward contracts
(MMH-exporter, 2/4) Suppose that Boeing exported a Boeing 737 to British Airways
and billed £10 million payable in one year. The market conditions are given as
, follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a
correct step of a money market hedge? - Answer-Boeing buys US dollars in the spot
market
Your firm has a British customer who is willing to place a $1 million order, but wants
to pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the
one-year forward rate is $1.90 = £1.00. The lead time on the order is such that
payment is due in one year. What is the fairest exchange rate to use? - Answer-
$1.90 = £1.00
(MMH_Importer, 3/4) A Boeing imported a Rolls-Royce jet engine for £5 million in
one year. The market conditions are given as follows: i$=6.0%, i£= 6.5%, S0 =
$1.80/£, F1 = $1.75/£. Which of the following is a correct step of a money market
hedge? - Answer-Boeing borrows $8,450,704.23 in the United States now
(MMH-exporter, 3/4) Suppose that Boeing exported a Boeing 737 to British Airways
and billed £10 million payable in one year. The market conditions are given as
follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a
correct step of a money market hedge? - Answer-Boeing lends $10,873,786.41 in
the United States now
(MMH-exporter, 1/4) Suppose that Boeing exported a Boeing 737 to British Airways
and billed £10 million payable in one year. The market conditions are given as
follows: i$=2%, i£ = 3%, S0 = $1.12/£1, F1 = $1.15/£1. Which of the following is a
correct step of a money market hedge? - Answer-Boeing borrows £9,708,737.86 in
the United Kingdom at the prevailing interest rate of 3%
Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts) are
available on the London exchange in units of €10,000 with strike prices of £0.80 =
€1.00. Options (calls and puts) are available on the Frankfurt exchange in units of
£10,000 with strike prices of €1.25 = £1.00. How many call or put options should the
UK firm to hedge a €100,000 receivables? - Answer-both choices are correct
Boeing imported a Rolls-Royce jet engine for £5 million in one year. Which of the
following is true, given the market conditions of i$=6%, i£ = 6.5%, S0 = $1.80/£, F1 =
$1.75/£? - Answer-If Boeing decides to use a currency option contract to hedge its
pound payable, it should buy call option
Assume that Boeing exported a Boeing 737 to British Airways and billed £10 million
payable in one year. Assume i$=6.1%, i£ = 10.9%, S0 = $1.50/£, F1 = $1.46/£ and
S1= $1.60/£. By implementing this forward hedging strategy, Boeing
___________________. - Answer-lost $1.4 million
Which of the following statement is FALSE? - Answer-WRONG
If you owe a foreign currency denominated debt, you can hedge with buying the
foreign currency today and investing it in the foreign county.
The most direct and popular way of hedging transaction exposure is by currency
forward contracts.
If you own a foreign currency denominated bond, you can hedge with a swap
contract where pay the cash flows of the bond in exchange for dollars.
