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Chapter 11 Example Questions
1.
Use the following information to calculate the dollar cost in 180 days of using a money market hedge to hedge
200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the
pound is $1.38 and the 180-day forward rate is $1.36. The British interest rate is 4% per year (2% per 180-day
period), and the U.S. interest rate is 2% per year (1% per 180-day period). Compare the Money Market Hedge
to the Forward Hedge. (assume borrowing and lending rates are the same)
2. Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates:
360-day borrowing rate
360-day deposit rate
U.S.
4%
2%
Switzerland
3%
1%
Assume the forward rate of the Swiss franc is $0.98 and the spot rate of the Swiss franc is $.97. If Parker
Company uses a money market hedge, it will receive _______ in 360 days. Compare the Money market Hedge
to the Forward Hedge.
3. Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Today’s spot rate of the
S$ is $.71, and the 180-day forward rate is $.715. A call option on S$ exists, with an exercise price of $.70, a
premium of $.02, and a 180-day expiration date. A put option on S$ exists, with an exercise price of $.70, a
premium of $.01, and a 180-day expiration date. Jones has developed the following probability distribution for the
spot rate in 180 days:
Possible Spot Rate
in 180 Days
$.68
$.73
$.76
Probability
30%
60%
10%
The probability that the forward hedge will result in a higher payment than the options hedge is _______
(include the amount paid for the premium when estimating the U.S. dollars required for the options hedge).
4. Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today’s spot rate of the NZ$
is $0.64, and the 180-day forward rate is $0.63. A call option on NZ$ exists, with an exercise price of $.62, a
premium of $.03, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of $.62, a
premium of $.02, and a 180-day expiration date. Patton Co. has developed the following probability distribution
for the spot rate in 180 days:
Possible Spot Rate
in 180 Days
$.58
$.66
$.69
Probability
30%
60%
10%
The probability that the forward hedge will result in more U.S. dollars received than the options hedge is
_______ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options
hedge).