Which statement concerning future contracts is false?

Futures contracts are pure credit instruments and have significant default risk.

Which is false regarding forward contracts versus futures contract?

Futures contracts usually can provide a perfect hedge of transaction exposure to currency risk.

Consider a "SFr Dec 7000 call" selling on the Chicago Mercantile Exchange (CME) at a price of $0.0180/SFr. Each CME Swiss Franc contract is worth SFr 125,000. What would be the profit on an investment in this option if the spot rate at expiration is $0.73

[($0.7320/SFr)-($0.7000/SFr)-($0.0180/SFr)]*SFr125,000=$1750

The advantages of *currency swap* over parallel loan include the following except

Swaps will be capitalized on the balance sheet.

A *floating-for-floating* currency swap is called a _________.

basis swap

The *functional currency* of a Mexican subsidiary that assembles computers using U.S.-made parts, which it then sells in the United States, would most likely be the

U.S. dollar

Which of the following products is most likely to benefit from *depreciation* of the dollar?

Chevrolet automobile with a highly price elastic demand

While the strategic marketing and production adjustments occur over the long run, *financial management* may finance the firm's operations such that shortfalls in cash flows during the adjustments are offset by a reduction in __________

debt-servicing

An *importer's* financial market hedging alternatives include:

Use currency swaps to acquire financial assets in the foreign currency.

On March 1, Bechtel submits a euro denominated bid on a project in France. Bechtel will not learn until June 1 whether it has won the contract. What is the most appropriate way for Bechtel to manage the exchange risk on this contract?

buy a put option on euro in the amount of the euro exposure

A U.S company ABC Trading hedges a euro 6.4 million receivable due in 90 days. The current spot rate is euro 1 = $1.2354 and the 90 day forward rate is euro 1 = $1.2375. If the spot rate at the end of 90 days is $1.2391, how much has the forward market *h

$10,240
If hedging, receive $1.2375/?*?6.4 million = $7.92 million. If not hedging, receive $1.2391/?*?6.4 million = $7.93024million. The cost is $7.93024million - $7.92million=$10240.

*Translation exposure* reflects the exposure of a company's

financial statements to currency movements

The most important aspect of the *FASB-52* is that

most translation gains and losses bypass the income statement and are accumulated in a separate equity account on the parent's balance sheet

Exchange rate risk of a foreign currency payable is an example of

transaction exposure

A depreciating currency makes:

Export and import-competing goods more competitive

The price elasticity of demand for commodity products tends to be

highly elastic

A domestic firm that sources and sells only domestically,

faces exchange rate risk to the extent that it has international competitors in the domestic market.

Spreads between the loan rates and borrowing rates are ________________ in the Eurocurrency markets ____________ domestic markets

narrower, than

Under the current/noncurrent method

a foreign subsidiary with current assets in excess of current liabilities will cause a translation gain (loss) if the local currency appreciates (depreciates).

Suppose the English subsidiary of a U.S. firm had current assets of �2 million and current liabilities of 1 million pounds both at the start and at the end of the year. There are no long-term liabilities. If the pound depreciated during that year from $1.

-$400,000
Exposure is: �1 million + �2 million - �1 million = �2 million
Translation gain (loss) is: �2 million * ($1.30/�-$1.50/�) = -400,000.

E & J Gallo is the largest vintner in the United States. It gets its grapes in California and sells its wines throughout the United States. Does Gallo face currency risk? Why and how?

E & J Gallo faces exchange risk because its wines are competing against foreign wines and changes in the value of the dollar affect its competitiveness. In the early 1980s, for example, the soaring dollar enabled vintners from countries such as France and

Boeing Commercial Airplane Co. manufactures all its planes in the United States and prices them in dollars, even the 50% of its sales destined for overseas markets. Assess Boeing's currency risk.
Would Boeing have currency risk if there is no foreign comp

Boeing would have currency risk even in the absence of foreign competition since currency fluctuations will translate its dollar prices into varying amounts of foreign currency to its foreign customers. Given that foreign demand is somewhat responsive to

Boeing Commercial Airplane Co. manufactures all its planes in the United States and prices them in dollars, even the 50% of its sales destined for overseas markets. Assess Boeing's currency risk.
In reality, Boeing does face a major foreign competitor - A

The existence of Airbus increases Boeing's price elasticity of demand and, hence, its exchange risk. That is, Boeing is hurt more by dollar appreciation and helped more by dollar depreciation).

Boeing Commercial Airplane Co. manufactures all its planes in the United States and prices them in dollars, even the 50% of its sales destined for overseas markets. Assess Boeing's currency risk.
Give three non-financial tactics Boeing might initiate to r

#1 Boeing can cope with this currency risk by sourcing some of its parts and components abroad.
#2 It can also attempt to develop new markets and new competitive advantages that reduce the price elasticity of demand.
#3 It may be able to cut costs through

On Jan. 1, 2002, GE secured a contract of 10 million euros to supply blades to a German airline; On Dec. 31, 2002, GE will receive 10 million euros payment for these blades. The spot rate is $1/euro, and one-year forward rate is $0.957/euro.
a) What dolla

By selling euro forward, GE can lock in dollar revenue of $9,570,000 (euro 10 m * $0.957/euro = $9.57 million).

On Jan. 1, 2002, GE secured a contract of 10 million euros to supply blades to a German airline; On Dec. 31, 2002, GE will receive 10 million euros payment for these blades. The spot rate is $1/euro, and one-year forward rate is $0.957/euro.
b) GE can avo

If one is dealing with informed customers, it is hard to gain from risk shifting. The general rule on credit sales overseas is to convert between the foreign currency price and the dollar price by using the forward rate, not the spot rate. So the German a

On Jan. 1, 2002, GE secured a contract of 10 million euros to supply blades to a German airline; On Dec. 31, 2002, GE will receive 10 million euros payment for these blades. The spot rate is $1/euro, and one-year forward rate is $0.957/euro.
Instead of a

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