Int Fin

A forward contract hedge is very similar to a futures contract hedge, except that ____ contracts are commonly used for ____ transactions.

. forward; large

Which of the following reflects a hedge of net payables in British pounds by a U.S. firm? a. Purchase a currency put option in British pounds.

Borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.

If interest rate parity exists and transaction costs are zero, the hedging of payables in euros with a forward hedge will:

c. have the same result as a money market hedge on payables.

Like income tax treaties, ____ help to avoid double taxation and stimulate direct foreign investment.

c. tax credits

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:

c. the currency of the host country is expected to depreciate consistently.

An MNC wants to hedge against the potential risk that the euro denominating its payables appreciates against the dollar. Yet, it also wants flexibility to benefit by buying euros at the spot rate when payables are due if the euro depreciates by that time. The appropriate hedge for this MNC would be a(n) ____ hedge.

call option

Assume that Cooper Co. will not use its cash balances in a money market hedge. When deciding between a forward hedge and a money market hedge, it ____ determine which hedge is preferable before implementing the hedge. It ____ determine whether either hedge will outperform an unhedged strategy before implementing the hedge.

can, cannot

A ____ does not represent an obligation.

currency option

22. The required rate of return of a project is ____ the MNC's cost of capital.

d. Any of the these, depending on the specific project.

f a subsidiary project is assessed from the subsidiary's perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project:

d. None of these are correct.

The break-even salvage value of a particular project is the salvage value necessary to:

d. achieve a zero net present value for the project.

ssume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____.

d. depreciates; decreases

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

d. simulation.

A money market hedge on payables would involve, among others, borrowing ____ and investing in the ____.

dollars, foreign currency

. If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.

forward

A ____ is not normally used for hedging long-term transaction exposure.

futures contract

A foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent's perspective. Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in Japan would now be ____ from the parent's perspective.

higher than that for the Hungarian project

The ____ hedge is not a technique to eliminate transaction exposure discussed in your text.

index

Which of the following might be used to hedge exposure in the long run?

long term forward contract AND parallel loan

Assume zero transaction costs. If the 90- day forward rate of the euro underestimates the spot rate 90 days from now then the real cost of hedging payables will be

negative

From the perspective of Detroit Co. which has payables in Mexican pesos, hedging the payables is especially beneficial if the expected real cost of hedging the payables is

negative

An example of cross heading is

obtain a forward contract to purchase a currency that is highly correlated with the currency in which the payables are due

A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.

parallel loan

To hedge a ____________ in a foreign currency, a firm may ______ a currency futures contract for that currency

payable, purchase

Assume zero transaction costs. If the 180-day forward rate overestimates the spot rate 180 days from now, then the real cost of hedging payables will be:

positive

Holding other factors constant, an international project's NPV is ____ related to consumer demand and ____ related to the project's salvage value.

positively, positvely

Johnson Co. has 1,000,000 euros as payables due in 30 days, and is certain that the euro is going to appreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:

purchase euros forward

If Salerno Inc. desires to lock in a minimum rate at which it could sell its net receivables in Japanese yen but wants to be able to capitalize if the yen appreciates substantially against the dollar by the time payment arrives, the most appropriate hedge would be:

purchase yen put option

Linden Co. has 1,000,000 euros as payables due in 90 days, and is certain that the euro is going to depreciate substantially over time. Assuming the firm is correct, the ideal strategy is to:

remain unhedged

Foghat Co. has 1,000,000 euros as receivables due in 30 days, and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to:

sell euros forard

In a forward hedge, if the forward rate is an accurate predictor of the future spot rate, the real cost of hedging payables will be

zero

when a perfect hedge is not available to eliminate transaction exposure, the firm may consider methods to at least reduce exposure

E all of the above

Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV

b. higher; higher

The real cost of hedging payables with a forward contract equals:

the dollar cost of hedging minus the follar cost of not hedging

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

the parent's cost of capital.

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is:

volatile

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:

zero