1. Make sure to show your work. Answers on exam book WILL BE GRADED and DO 2. Pl
ID: 2792888 • Letter: 1
Question
1. Make sure to show your work. Answers on exam book WILL BE GRADED and DO 2. Please choose only one answer for questions 1-7, and fill out the Scan-Tron form 3. Answer questions 8-15 directly on the test in the places provided. SHOW YOUR COUNT, No Credit will be given if you didn't show your work! with the appropriate answer. YOU HAVE TO SHOW YOUR WORK WORK. Print Your Name: Sign Your Name: 1) Forward Hedging: Assume that Plains States Manufacturing expects to receive Euro 1,250,000 Euro in 6 months. The six month forward rate is $1.38/Euro. If Plains States chooses to hedge its transaction exposure in the forward market, it will 1,250,000 forward, and the firm's cost of forward hedging equals A) Sell; S1,725,000 B) Sell; $1,525,000 C) Buy; $1,725,000 D) Buy: $1,525,000 Money Market Hedging- A/R: Compaq Computer has a £1 million receivable that it expects to collect in one year. Suppose the interest rate on pounds is 15%. How could Compaq protect this receivable using a money market hedge? A) Borrow £1 million pounds today B) Lend £l million pounds today C) Borrow £869,565 pounds today D) Lend £986,754 pounds today 3) Money Market Hedging- A/P: Suppose General Motors uses a money market hedge to protect CAD 200,000 payable due in one year. -The US. interest rate at the time of the hedge was 9% -The Canadian interest rate was 14%. - The spot rate is $0.75/CAD What was GM's cost of the money market hedge? A) $123,256 B) $143,421 C) $162,987 D) S128,345Explanation / Answer
1
Forward contracts are hedging instruments which can be bought at a price to hedge risk. In case of a downside, the firm will get the promised rate for Euros but in case of an upside, it would have bought the forward contracts for nothing.
Cost of hedging = Price per forward contract * number of forward contracts = $1.38/Euro * 1,250,000 = $1,725,000
Option C is correct
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