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BU.232.710.W2.SP25 Quiz 1
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A company anticipates receiving 30,000 Japanese Yen in 6 months. How can the company use forward contracts to establish a perfect hedge if each forward contract is for 10,000 Japanese yen and expires in 6 months? The company should short 3 futures.
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To understand the hedging setup, first note the company expects to receive 30,000 Japanese Yen in 6 months. When you hedge a future foreign-currency receivable, you typically lock in the rate by selling the foreign currency forward (or in futures terms, taking a short position in the forward/futures contract on that currency). This is because you will end up with Yen and want to convert it at a known rate later......Login to view full explanationLog in for full answers
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Similar Questions
Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.
Which of the following is cited as a good reason for NOT hedging currency exposures?
Question24 Assume that we have:Spot exchange rate: AUD 1.50 per USDOne-year forward rate: AUD 1.55 per USDRisk-free interest rate in USD: 3% (annualized)Risk-free interest rate in AUD: 5% (annualized) (1) A company has to pay a cost of USD 1 million to its supplier next year. Should the company hedge with a forward contract or do the money market transaction? Present value of cost if using forward = AUD [input] million (1 point)Present value of cost if using money market transaction = AUD [input] million (1point)The company should choose[select: , Forward contract, Indifferent between the two, Money market transaction] (1 point) (2) A company will receive a revenue of USD 1 million from its customer next year. To better hedge the exchange risk, what can the company do (purchase forward contracts or hedge by money market transactions)? Present value of revenue if using forward = AUD [input]million (1 point)Present value of revenue if using money market transaction = AUD [input]million (1 point)The company should choose [select: , Money market transaction, Forward contract, Indifferent between the two] (1 point) Note: (1) Round your answers to 3 decimal places, unless the result is an integer.(2) Keep at least 4 decimal places during your calculations to ensure accurate rounding in the final results.(3) You will get 8 points if all the answers are correct. ResetMaximum marks: 8 Unflag question undefined [select: , Money market transaction, Forward contract, Indifferent between the two]
Question24 Assume that we have:Spot exchange rate: AUD 1.50 per USDOne-year forward rate: AUD 1.55 per USDRisk-free interest rate in USD: 3% (annualized)Risk-free interest rate in AUD: 5% (annualized) (1) A company has to pay a cost of USD 1 million to its supplier next year. Should the company hedge with a forward contract or do the money market transaction? Present value of cost if using forward = AUD [input] million (1 point)Present value of cost if using money market transaction = AUD [input] million (1point)The company should choose[select: , Forward contract, Indifferent between the two, Money market transaction] (1 point) (2) A company will receive a revenue of USD 1 million from its customer next year. To better hedge the exchange risk, what can the company do (purchase forward contracts or hedge by money market transactions)? Present value of revenue if using forward = AUD [input]million (1 point)Present value of revenue if using money market transaction = AUD [input]million (1 point)The company should choose [select: , Money market transaction, Forward contract, Indifferent between the two] (1 point) Note: (1) Round your answers to 3 decimal places, unless the result is an integer.(2) Keep at least 4 decimal places during your calculations to ensure accurate rounding in the final results.(3) You will get 8 points if all the answers are correct. ResetMaximum marks: 8 Unflag question undefined [input]
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