# Suppose DEC buys a Swiss franc futures contract (size is SFr 125,000) at a price of \$0.83, 10 International Business Finance Questions

### QUESTION 1

1. Suppose DEC buys a Swiss franc futures contract (size is SFr 125,000) at a price of \$0.83. If the spot rate for the Swiss franc at the date of settlement is SFr 1 = \$0.8250, what is DEC’s gain or loss on this contract?

 \$1125 gain \$625 loss \$125 loss \$2675 gain

10 points

### QUESTION 2

1. On January 10, Volkswagen agrees to import auto parts worth \$7 million from the U.S. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is \$1.3447/€ and the March futures price is \$1.3502. Calculate the number of futures contracts that VW must buy or sell to offset its dollar exchange risk on the parts contract if each contract is worth €125,000.

 buy 46 contracts sell 42 contracts sell 40 contracts buy 26 contracts

10 points

### QUESTION 3

1. On January 10, Volkswagen agrees to import auto parts worth \$7 million from the U.S. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is \$1.3447/€ and the March futures price is \$1.3502. On March 4, the spot rate turns out to be \$1.3452/€, while the March futures price is \$1.3468/€. Calculate VW’s net euro gain or loss on its futures position.

 \$13,850 loss \$13,850 gain \$17,850 loss \$17,850 gain

10 points

### QUESTION 4

1. Citigroup sells a call option on euros (contract size is €500,000) at a premium of \$0.04 per euro. If the exercise price is \$1.34 and the spot price of the euro at expiration is \$1.36, what is Citigroup’s profit (loss) on the call option?

 \$20,000 loss \$10,000 gain \$30,000 gain \$40,000 loss

10 points

### QUESTION 5

1. Suppose you buy three June PHLX call options with a 90 strike price at a price of 2.3 (¢/€). What would be your total dollar cost for these calls, ignoring broker fees?

 \$2,612.50 \$3,314.50 \$4,312.50 \$12,513.50

10 points

### QUESTION 6

1. American Airlines is trying to decide how to go about hedging 70 million swiss francs in ticket sales receivable in 180 days. Suppose it faces the following exchange and interest rates. Spot rate: \$0.6433-42/SFr Forward rate (180 days): \$0.6578-99/SFr DM 180-day interest rate (annualized): 4.01%-3.97% U.S. dollar 180-day interest rate (annualized): 8.01%-7.98% What is the hedged value of American’s ticket sales using a forward market hedge?

 \$44,000,000 \$46,046,000 \$66,036,000 \$127,042,000

10 points

### QUESTION 7

1. American Airlines is trying to decide how to go about hedging 70 million swiss francs in ticket sales receivable in 180 days. Suppose it faces the following exchange and interest rates. Spot rate: \$0.6433-42/SFr Forward rate (180 days): \$0.6578-99/SFr DM 180-day interest rate (annualized): 4.01%-3.97% U.S. dollar 180-day interest rate (annualized): 8.01%-7.98% What is the hedged value of American’s ticket sales using a money market hedge? Assume the first interest rate is the rate at which money can be borrowed and the second one the rate at which it can be lent.

 \$42,999,212 \$45,907,296 \$41,450,291 \$35,501,223

10 points

### QUESTION 8

1. Dell Inc. produces its machines in Asia with components largely imported from the U.S. and sells its products in various Asian nations in local currencies. What is the likely impact on Dell’s Asian profits of a strengthened dollar?

 Reduce profits Increase profits

10 points

### QUESTION 9

1. Dell Inc. produces its machines in Asia with components largely imported from the U.S. and sells its products in various Asian nations in local currencies. What hedging technique(s) can Dell employ to lock in a desired currency conversion rate for its Asian sales during the next year?