Find real cost of hedging payables

Reference no: EM1350059

1) Assume zero transaction costs. If the 90 day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:

A) positive.
B) negative.
C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D) zero.

2) Assume the following information:

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
Swiss deposit rate for 1 year = 8%
Swiss borrowing rate for 1 year = 10%
Swiss forward rate for 1 year = $.40
Swiss franc spot rate = $.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge?
A) $234,000.
B) $238,584.
C) $240,000.
D) $236,127.

3) Which of the following is an example of economic exposure but not an example of transaction exposure?
A) An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.
B) An increase in the pound's value increases the U.S. firm's cost of British pound payables.
C) A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.
D) A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

4) It is generally least difficult to effectively hedge various types of:
A) translation exposure.
B) transaction exposure.
C) economic exposure.
D) A and C

Reference no: EM1350059

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