All Related Questions of Hedge

Q: On December 31, 2014, Mercantile Corp. had a $

On December 31, 2014, Mercantile Corp. had a $10,000,000, 8% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate d...

Q: LEW Jewelry Co. uses gold in the manufacture of its products

LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2014, for jewelry that will be shipped for the holiday shoppin...

Q: Hart Golf Co. uses titanium in the production of its specialty

Hart Golf Co. uses titanium in the production of its specialty drivers. Hart anticipates that it will need to purchase 200 ounces of titanium in November 2014, for clubs that will be shipped in the sp...

Q: On November 3, 2014, Sprinkle Co. invested $200

On November 3, 2014, Sprinkle Co. invested $200,000 in 4,000 shares of the common stock of Pratt Co. Sprinkle classified this investment as available-for-sale. Sprinkle Co. is considering making a mor...

Q: Bubbling Crude Corporation, a large Texas oil producer, would like

Bubbling Crude Corporation, a large Texas oil producer, would like to hedge against adverse movements in the price of oil because this is the firm’s primary source of revenue. What should the firm do?...

Q: Refer to Table 25.2 given below to answer this question

Refer to Table 25.2 given below to answer this question. Suppose today is November 22, 2011, and your firm produces breakfast cereal and needs 140,000 bushels of corn in March 2012 for an upcoming pro...

Q: If a textile manufacturer wanted to hedge against adverse movements in cotton

If a textile manufacturer wanted to hedge against adverse movements in cotton prices, it could buy cotton futures contracts or buy call options on cotton futures contracts. What would be the pros and...

Q: Kevin Nomura is a Japanese student who is planning a one year

Kevin Nomura is a Japanese student who is planning a one year stay in the United States. He expects to arrive in the United States in eight months. He is worried about depreciation of the yen relative...

Q: If a U.S. company exports its goods to Japan

If a U.S. company exports its goods to Japan, how would it use a futures contract on Japanese yen to hedge its exchange rate risk? Would it buy or sell yen futures? Does the way the exchange rate is q...

Q: Assume that you recently graduated with a degree in finance and have

Assume that you recently graduated with a degree in finance and have just reported to work as an investment adviser at the brokerage firm of Smyth Barry & Co. Your first assignment is to explain the n...

Q: Explain whether the following statements are true or false. a

Explain whether the following statements are true or false. a. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high retu...

Q: The Zinn Company plans to issue $20,000,000

The Zinn Company plans to issue $20,000,000 of 10-year bonds in December to help finance a new research and development laboratory. It is now August, and the current cost of debt to the high-risk biot...

Q: You plan to invest in the Kish Hedge Fund, which has

You plan to invest in the Kish Hedge Fund, which has total capital of $500 million invested in five stocks: Kish’s beta coefficient can be found as a weighted average of its stocks&...

Q: Assume that you have just been hired as a financial analyst by

Assume that you have just been hired as a financial analyst by Tropical Sweets Inc., a midsized California company that specializes in creating exotic candies from tropical fruits such as mangoes, pap...

Q: a. Rework Problem 18-4 using the spreadsheet model.

a. Rework Problem 18-4 using the spreadsheet model. Data from Problem 18-4 Assume that you have been given the following information on Purcell Industries: Using the Black-Scholes Option Pricing Mod...

Q: What are some of the similarities and differences among mutual funds,

What are some of the similarities and differences among mutual funds, pension funds, and hedge funds?

Q: You are a broker for frozen seafood products for Choyce Products.

You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will deliver 4000 kilograms of fro...

Q: Apnex, Inc., is a biotechnology firm that is about to

Apnex, Inc., is a biotechnology firm that is about to announce the results of its clinical trials of a potential new cancer drug. If the trials were successful, Apnex stock will be worth $70 per share...

Q: Explain how back-to-back loans can hedge foreign exchange

Explain how back-to-back loans can hedge foreign exchange operating exposure.

Q: Explain how currency swaps can hedge foreign exchange operating exposure. What

Explain how currency swaps can hedge foreign exchange operating exposure. What are the accounting advantages of currency swaps?

Q: Name the four main contractual instruments used to hedge transaction exposure.

Name the four main contractual instruments used to hedge transaction exposure.

Q: One way to hedge a foreign-currency transaction loss is to

One way to hedge a foreign-currency transaction loss is to a. Pay debts as late as possible. b. Pay in the foreign currency. c. Off set foreign-currency inventory and plant assets. d. Collect in your...

Q: Midland Chemical Co. is negotiating a loan from Manhattan Bank and

Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow $500,000. The bank offers a rate of 8 ¼ percent with a 20 percent compensating bala...

Q: The treasurer for Thornton Pipe and Steel Company wishes to use financial

The treasurer for Thornton Pipe and Steel Company wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $105,000 per contract. It is Jul...

Q: Imagine that you are a financial manager of a multinational corporation,

Imagine that you are a financial manager of a multinational corporation, like Starbucks Coffee, in charge of determining the impact of exchange rate changes on the firm. Changes in currency exchange a...

Q: On December 31, 2012, Mercantile Corp. had a $

On December 31, 2012, Mercantile Corp. had a $10,000,000, 8% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate d...

Q: LEW Jewelry Co. uses gold in the manufacture of its products

LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2012, for jewelry that will be shipped for the holiday shoppin...

Q: On November 3, 2012, Sprinkle Co. invested $200

On November 3, 2012, Sprinkle Co. invested $200,000 in 4,000 shares of the common stock of Pratt Co. Sprinkle classified this investment as available-for-sale. Sprinkle Co. is considering making a mor...

Q: Hart Golf Co. uses titanium in the production of its specialty

Hart Golf Co. uses titanium in the production of its specialty drivers. Hart anticipates that it will need to purchase 200 ounces of titanium in October 2012, for clubs that will be shipped in the hol...

Q: General Electric Company’s worldwide performance evaluation system is based on a policy

General Electric Company’s worldwide performance evaluation system is based on a policy of decentralization. The policy reflects its conviction that managers will become more responsible and their bus...

Q: The scene is a conference room on the 10th floor of an

The scene is a conference room on the 10th floor of an office building on Wall Street, occupied by Anthes Enterprises, a small, rapidly growing manufacturer of electronic trading systems for equities,...

Q: Explain how a company might use a currency swap to hedge its

Explain how a company might use a currency swap to hedge its foreign exchange risk on a foreign currency borrowing.

Q: Trojan Corporation USA borrowed 1,000,000 New Zealand dollars

Trojan Corporation USA borrowed 1,000,000 New Zealand dollars (NZ$) at the beginning of the calendar year when the exchange rate was $0.60 = NZ$1. Before repaying this one-year loan, Trojan learns tha...

Q: On April 1, Anthes Corporation, a calendar-year U

On April 1, Anthes Corporation, a calendar-year U.S. electronics manufacturer, invests 30 million yen in a three-month yen-denominated CD with a fixed coupon of 8 percent. To hedge against the depreci...

Q: The Volkswagen Group adopted International Accounting Standards (IAS, now International

The Volkswagen Group adopted International Accounting Standards (IAS, now International Financial Reporting, or IFRS) for its 2001 fiscal year. The following is taken from Volkswagen’...

Q: Consider the same 3-year oil swap. Suppose a dealer

Consider the same 3-year oil swap. Suppose a dealer is paying the fixed price and receiving floating. What position in oil forward contracts will hedge oil price risk in this position? Verify that the...

Q: What is the rate on a synthetic FRA for a 180-

What is the rate on a synthetic FRA for a 180-day loan commencing on day 180? Suppose you are the counterparty for a borrower who uses the FRA to hedge the interest rate on a $10m loan. What positions...

Q: Suppose you are the counterparty for a lender who enters into an

Suppose you are the counterparty for a lender who enters into an FRA to hedge the lending rate on $10m for a 90-day loan commencing on day 270. What positions in zero-coupon bonds would you use to hed...

Q: Golddiggers has zero net income if it sells gold for a price

Golddiggers has zero net income if it sells gold for a price of $380. However, by shorting a forward contract it is possible to guarantee a profit of $40/oz. Suppose a manager decides not to hedge and...

Q: Problem 12.11 showed how to compute approximate Greek measures for

Problem 12.11 showed how to compute approximate Greek measures for an option. Use this technique to compute delta for the gap option in Figure 14.3, for stock prices ranging from $90 to $110 and for t...

Q: Suppose the S&P 500 currently has a level of 875

Suppose the S&P 500 currently has a level of 875. The continuously compounded return on a 1-year T-bill is 4.75%. You wish to hedge an $800,000 portfolio that has a beta of 1.1 and a correlation of 1....

Q: Suppose the September Eurodollar futures contract has a price of 96.

Suppose the September Eurodollar futures contract has a price of 96.4. You plan to borrow $50m for 3 months in September at LIBOR, and you intend to use the Eurodollar contract to hedge your borrowing...

Q: Consider two zero-coupon bonds with 2 years and 10 years

Consider two zero-coupon bonds with 2 years and 10 years to maturity. Let a =0.2, b = 0.1, r = 0.05, σVasicek = 10%, and σCIR = 44.721%. The interest rate risk premium is zero in each case. We will co...

Q: Suppose you are selecting a futures contract with which to hedge a

Suppose you are selecting a futures contract with which to hedge a portfolio. You have a choice of six contracts, each of which has the same variability, but with correlations of −0.95, −0.75, −0.50,...

Q: Consider the same facts as the previous problem, only now consider

Consider the same facts as the previous problem, only now consider hedging with the 3-month Eurodollar futures. Suppose the Eurodollar futures contract that matures 60 days from today has a price on d...

Q: What is hedge accounting?

What is hedge accounting?

Q: Under what conditions can companies use hedge accounting to account for a

Under what conditions can companies use hedge accounting to account for a foreign currency option used to hedge a forecasted foreign currency transaction?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as (a) A cash flow hedge and (b) A fair value hedge of a foreign currency denominated asset or liability?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a fair value hedge of (a) A foreign currency denominated asset or liability and (b) A foreign currency firm commitment?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a cash flow hedge of (a) A foreign currency denominated asset or liability and (b) A forecasted foreign currency transaction?

Q: A U.S. exporter has a Thai baht account receivable

A U.S. exporter has a Thai baht account receivable resulting from an export sale on June 1 to a customer in Thailand. The exporter signed a forward contract on June 1 to sell Thai baht and designated...

Q: St. Philip Company ordered parts costing €100,000 from

St. Philip Company ordered parts costing €100,000 from a foreign supplier on January 15 when the spot rate was $0.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at...

Q: Assuming that MNC entered into a forward contract to sell 10 million

Assuming that MNC entered into a forward contract to sell 10 million South Korean won on December 1, 2017, as a fair value hedge of a foreign currency receivable, what is the net impact on its net inc...

Q: On March 1, Pimlico Corporation (a U.S.-

On March 1, Pimlico Corporation (a U.S.-based company) expects to order merchandise from a supplier in Sweden in three months. On March 1, when the spot rate is $0.10 per Swedish krona, Pimlico enters...

Q: Torres Corporation (a U.S.-based company) expects

Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 100,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchase...

Q: What was the net impact on Jensen Company’s 2017 income as a

What was the net impact on Jensen Company’s 2017 income as a result of this fair value hedge of a firm commitment? a. $–0–. b. $680.30 decrease in income. c. $300 increase in income. d. $980.30 increa...

Q: What was the net impact on Jensen Company’s 2018 income as a

What was the net impact on Jensen Company’s 2018 income as a result of this fair value hedge of a firm commitment? a. $–0–. b. $1,319.70 decrease in income. c. $77,980.30 increase in income. d. $78,68...

Q: What was the net increase or decrease in cash flow from having

What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? a. $–0–. b. $1,000 increase in cash flow. c. $1,50...

Q: What is the net impact on Micro’s net income for the quarter

What is the net impact on Micro’s net income for the quarter ended June 30, 2017, as a result of this forward contract hedge of a firm commitment? a. $–0–. b. $2,400 increase in net income. c. $4,000...

Q: What is the net impact on Micro’s net income for the quarter

What is the net impact on Micro’s net income for the quarter ended September 30, 2017, as a result of this forward contract hedge of a firm commitment? a. $–0–. b. $115,000 increase in net income. c....

Q: What is Micro’s net increase or decrease in cash flow from having

What is Micro’s net increase or decrease in cash flow from having entered into this forward contract hedge? a. $–0–. b. $1,000 increase in cash flow. c. $1,500 decrease in cash flow. d. $2,000 increas...

Q: What is the net impact on Dos Santos Company’s 2017 net income

What is the net impact on Dos Santos Company’s 2017 net income as a result of this hedge of a forecasted foreign currency transaction? a. $–0–. b. $400 decrease in net income. c. $1,000 decrease in ne...

Q: What is the net impact on Dos Santos Company’s 2018 net income

What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of t...

Q: Brandlin Company of Anaheim, California, sells parts to a foreign

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 16,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract...

Q: Use the same facts as in Problem 31 except that Brandlin Company

Use the same facts as in Problem 31 except that Brandlin Company purchases materials from a foreign supplier on December 1, 2017, with payment of 16,000 korunas to be made on March 1, 2018. The materi...

Q: On June 1, Alexander Corporation sold goods to a foreign customer

On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,000,000 pesos and will receive payment in three months on September 1. On June 1, Alexander acquired an option to sell...

Q: On June 1, Cairns Corporation purchased goods from a foreign supplier

On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on September 1. On June 1, Cairns acquired an option to purch...

Q: On November 1, 2017, Bernard Company (a U.

On November 1, 2017, Bernard Company (a U.S.-based company) sold merchandise to a foreign customer for 100,000 FCUs with payment to be received on April 30, 2018. At the date of sale, Bernard entered...

Q: Eximco Corporation (based in Champaign, Illinois) has a number

Eximco Corporation (based in Champaign, Illinois) has a number of transactions with companies in the country of Mongagua, where the currency is the mong. On November 30, 2017, Eximco sold equipment at...

Q: On October 1, 2017, Sharp Company (based in Denver

On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 100,000 rubles in four months (on January 31, 2018) and receive $39,000 in U.S. dollars. Exchange...

Q: On August 1, Ling-Harvey Corporation (a U.

On August 1, Ling-Harvey Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 ringgits. Ling-Harvey will receive and make payment f...

Q: On June 1, Vandervelde Corporation (a U.S.-

On June 1, Vandervelde Corporation (a U.S.-based manufacturing firm) received an order to sell goods to a foreign customer at a price of 100,000 leks. Vandervelde will ship the goods and receive payme...

Q: Spitz Company ordered merchandise from a foreign supplier on November 20 at

Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 100,000 forints when the spot rate was $0.50 per forint. Delivery and payment were scheduled for December 20. On...

Q: Based on past experience, Leickner Company expects to purchase raw materials

Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 marks on March 15, 2018. To hedge this forecasted transaction, the company a...

Q: Vino Veritas Company, a U.S.-based importer of

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,000 cases of wine at a price of 200 euros per case. The total purchase price is 200,000 e...

Q: Fergusson Corporation, a U.S. company, manufactures components

Fergusson Corporation, a U.S. company, manufactures components for the automobile industry. In the past, Fergusson purchased actuators used in its products from a supplier in the United States. The co...

Q: On February 1, 2017, Linber Company forecasted the purchase of

On February 1, 2017, Linber Company forecasted the purchase of component parts on May 1, 2017, at a price of 100,000 euros. On that date, Linber entered into a forward contract to purchase 100,000 eur...

Q: The Pier Ten Company, a U.S. company,

The Pier Ten Company, a U.S. company, made credit sales to four customers in Asia on September 15, 2015, and received payment on October 15, 2015. Information related to these sales is as follows: T...

Q: Palmetto Bug Extermination Corporation (PBEC), a U.S.

Palmetto Bug Extermination Corporation (PBEC), a U.S. company, regularly purchases chemicals from a supplier in Switzerland with the invoice price denominated in Swiss francs. PBEC has experienced sev...

Q: Why might a company want to hedge its balance sheet exposure?

Why might a company want to hedge its balance sheet exposure? What is the paradox associated with hedging balance sheet exposure?

Q: How are gains and losses on financial instruments used to hedge the

How are gains and losses on financial instruments used to hedge the net investment in a foreign operation reported in the consolidated financial statements?

Q: The functional currency of Bertrand, Inc.’s Irish subsidiary is

The functional currency of Bertrand, Inc.’s Irish subsidiary is the euro. Bertrand borrowed euros as a partial hedge of its investment in the subsidiary. Since then, the euro has decreased in value. B...

Q: Board Company has a foreign subsidiary that began operations at the start

Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 132,000 kites (the local currency unit) and liabilities of 54,000 kites. During this initial year of op...

Q: XYZ wants to hedge against depreciations of the euro and is also

XYZ wants to hedge against depreciations of the euro and is also concerned about the price of oil, which is a significant component of XYZ’s costs. However, there is a positive correlation between the...

Q: Suppose that S = $100, σ = 30%, r

Suppose that S = $100, σ = 30%, r = 6%, t = 1, and δ = 0. XYZ writes a European put option on one share with strike price K = $90. a. Construct a two-period binomial tree for the stock and price the p...

Q: Repeat the previous problem, except that instead of hedging volatility risk

Repeat the previous problem, except that instead of hedging volatility risk, you wish to hedge interest rate risk, i.e., to rho-hedge. In addition to delta-, gamma-, and rho-hedging, can you delta-gam...

Q: A collect-on-delivery call (COD) costs zero

A collect-on-delivery call (COD) costs zero initially, with the payoff at expiration being 0 if S

Q: Suppose the yield curve is flat at 8%. Consider 3-

Suppose the yield curve is flat at 8%. Consider 3- and 6-year zero-coupon bonds. You buy one 3-year bond and sell an appropriate quantity of the 6-year bond to duration hedge the position. Any additio...

Q: Suppose you are a market-maker in S&R index

Suppose you are a market-maker in S&R index forward contracts. The S&R index spot price is 1100, the risk-free rate is 5%, and the dividend yield on the index is 0. a. What is the no-arbitrage forward...

Q: Suppose that in order to hedge interest rate risk on your borrowing

Suppose that in order to hedge interest rate risk on your borrowing, you enter into an FRA that will guarantee a 6%effective annual interest rate for 1 year on $500,000.00. On the date you borrow the...

Q: Using the information in Table 4.9 about Scenario C:

Using the information in Table 4.9 about Scenario C: a. Using your answer to the previous question, use equation (4.7) to compute the variance-minimizing hedge ratio. b. Run a regression of revenue o...

Q: Suppose the businesses in the previous problem use futures contracts to hedge

Suppose the businesses in the previous problem use futures contracts to hedge their temperature-related risk. Who do you think might accept the opposite risk?

Q: Consider the bonds in Example 7.8. What hedge ratio

Consider the bonds in Example 7.8. What hedge ratio would have exactly hedged the portfolio if interest rates had decreased by 25 basis points? Increased by 25 basis points? Repeat assuming a 50-basis...

Q: Repeat the previous problem, assuming that the dividend yield is 1

Repeat the previous problem, assuming that the dividend yield is 1.5%. Previous Problem Suppose you are a market-maker in S&R index forward contracts. The S&R index spot price is 1100, the risk-free...

Q: Suppose that price and quantity are positively correlated as in this table

Suppose that price and quantity are positively correlated as in this table: There is a 50% chance of either price. The futures price is $2.50. Demonstrate the effect of hedging if we do the following:...

Q: The Glover Scholastic Aid Foundation has received a €20 million global

The Glover Scholastic Aid Foundation has received a €20 million global governmentbond portfolio from a Greek donor. This bond portfolio will be held ineuros and managed separately fro...

Q: Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy

Princess Cruise Company (PCC) purchased a ship from Mitsubishi Heavy Industryfor 500 million yen payable in one year. The current spot rate is ¥124/$ and theone-year forward rate is 110/$. The annual...

Q: At the start of 1996, the annual interest rate was 6

At the start of 1996, the annual interest rate was 6 percent in the United Statesand 2.8 percent in Japan. The exchange rate was 95 yen per dollar at the time.Mr. Jorus, who is the manager of a Bermud...

Q: Consider a U.S.-based company that exports goods to

Consider a U.S.-based company that exports goods to Switzerland. The U.S. Companyexpects to receive payment on a shipment of goods in three months. Becausethe payment will be in Swiss francs, the U.S....

Q: In Example 10.2, a forward contract was used to

In Example 10.2, a forward contract was used to establish a derivatives “hedge” toprotect Centralia from a translation loss if the euro depreciated from â ...

Q: Suppose that you are a U.S.-based importer of

Suppose that you are a U.S.-based importer of goods from the United Kingdom.You expect the value of the pound to increase against the U.S. dollarover the next 30 days. You will be making payment on a...

Q: Jacob Bower has a liability that: • has a principal

Jacob Bower has a liability that: • has a principal balance of $100 million on June 30, 2008, • accrues interest quarterly starting on June 30, 2008, â€&...

Q: Recall the FRA problem presented as Example 11.2. Show

Recall the FRA problem presented as Example 11.2. Show how the bank canalternatively use a position in Eurodollar futures contracts to hedge the interestrate risk created by the maturity mismatch it h...

Q: George Johnson is considering a possible six-month $100 million

George Johnson is considering a possible six-month $100 million LIBOR-based,floating-rate bank loan to fund a project at terms shown in the table below. Johnsonfears a possible rise in the LIBOR rate...

Q: Suppose you are a British venture capitalist holding a major stake in

Suppose you are a British venture capitalist holding a major stake in an e-commercestart-up in Silicon Valley. As a British resident, you are concerned with the poundvalue of your U.S. equity position...

Q: Suppose that you hold a piece of land in the city of

Suppose that you hold a piece of land in the city of London that you may want tosell in one year. As a U.S. resident, you are concerned with the dollar value of theland. Assume that if the British eco...

Q: Discuss the advantages and disadvantages of maintaining multiple manufacturingsites as a hedge

Discuss the advantages and disadvantages of maintaining multiple manufacturingsites as a hedge against exchange rate exposure.

Q: After studying Iris Hamson’s credit analysis, George Davies is consideringwhether he

After studying Iris Hamson’s credit analysis, George Davies is consideringwhether he can increase the holding period return on Yucatan Resort’s excess cashholdings (which are held in pesos) by investi...

Q: It is Tuesday afternoon, February 14, 2012. Richard May

It is Tuesday afternoon, February 14, 2012. Richard May, Assistant Treasurer atAmerican Digital Graphics (ADG), sits in his office on the thirty-fourth floor of thebuilding that dominates Rockefeller...

Q: Airbus sold an A400 aircraft to Delta Airlines, a U.

Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 millionpayable in six months. Airbus is concerned about the euro proceeds from internationalsales and would like to contr...

Q: IBM purchased computer chips from NEC, a Japanese electronics concern,

IBM purchased computer chips from NEC, a Japanese electronics concern, andwas billed ¥250 million payable in three months. Currently, the spot exchangerate is ¥105/$ and the three-month forward rate i...

Q: Boeing just signed a contract to sell a Boeing 737 aircraft to

Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France willbe billed €20 million payable in one year. The current spot exchange rate is $1.05/€and the one-year forward r...

Q: Lynn Construction enters into a firm purchase commitment for equipment to be

Lynn Construction enters into a firm purchase commitment for equipment to be delivered on June 30, 2013, for a price of 10,000 GBP. It simultaneously signs a forward foreign exchange contract for 10,0...

Q: Kentucky Gold (KG) holds 10,000 gallons of whiskey

Kentucky Gold (KG) holds 10,000 gallons of whiskey in inventory on October 31, 2013, that costs $225 per gallon. KG contemplates selling the whiskey on March 31, 2014, when it completes the aging proc...

Q: Excerpts from the disclosures on derivatives made by a large beverage manufacturer

Excerpts from the disclosures on derivatives made by a large beverage manufacturer in Year 4 appear below: Our Company uses derivative financial instruments primarily to reduce our exposure to adverse...

Q: Part A. Floral Delivery, Inc. (FD)

Part A. Floral Delivery, Inc. (FD) acquired a fleet of vans on January 1, 2013, by issuing a $500,000, 4-year, 4% fixed rate note, with interest payable annually on December 3. FD has the option to r...

Q: Vulcan Materials Company, a member of the S&P 500

Vulcan Materials Company, a member of the S&P 500 Index, is the nation’s largest producer of construction aggregates, a major producer of asphalt mix and concrete, and a leading...

Q: Suppose you construct an option hedge by buying a levered position in

Suppose you construct an option hedge by buying a levered position in delta shares of stock and selling one call option. As the share price changes, the option delta changes, and you will need to adju...

Q: You own a $1 million portfolio of aerospace stocks with a

You own a $1 million portfolio of aerospace stocks with a beta of 1.2. You are very enthusiastic about aerospace but uncertain about the prospects for the overall stock market. Explain how you could h...

Q: a. Marshall Arts has just invested $1 million in long

a. Marshall Arts has just invested $1 million in long-term Treasury bonds. Marshall is concerned about increasing volatility in interest rates. He decides to hedge using bond futures contracts. Should...

Q: Securities A, B, and C have the following cash flows

Securities A, B, and C have the following cash flows:
a. Calculate their durations if the interest rate is 8%. b. Suppose that you have an investment of $10 million in A. What combination of B and...

Q: Legs Diamond owns shares in a Vanguard Index 500 mutual fund worth

Legs Diamond owns shares in a Vanguard Index 500 mutual fund worth $1 million on July 15. (This is an index fund that tracks the Standard and Poor’s 500 Index.) He wants to cash in now, but his accoun...

Q: Price changes of two gold-mining stocks have shown strong positive

Price changes of two gold-mining stocks have shown strong positive correlation. Their historical relationship is Average percentage change in A = .001 + .75 (percentage change in B) Changes in B expla...

Q: Consider the commodities and financial assets listed in Table 26.5

Consider the commodities and financial assets listed in Table 26.5. The risk-free interest rate is 6% a year, and the term structure is flat. a. Calculate the six-month futures price for each case. b....

Q: Your investment bank has an investment of $100 million in the

Your investment bank has an investment of $100 million in the stock of the Swiss Roll Corporation and a short position in the stock of the Frankfurter Sausage Company. Here is the recent price history...

Q: Exacta, s.a. Exacta, s.a

Exacta, s.a. Exacta, s.a., is a major French producer, based in Lyons, of precision machine tools. About two thirds of its output is exported. The majority of these sales is within the European Union....

Q: Companies may be affected by changes in the nominal exchange rate or

Companies may be affected by changes in the nominal exchange rate or in the real exchange rate. Explain how this can occur. Which changes are easiest to hedge against?

Q: A Ford dealer in the United States may be exposed to a

A Ford dealer in the United States may be exposed to a devaluation of the yen if this leads to a cut in the price of Japanese cars. Suppose that the dealer estimates that a 1% decline in the value of...

Q: “Last year we had a substantial income in sterling, which

“Last year we had a substantial income in sterling, which we hedged by selling sterling forward. In the event sterling appreciated. So our decision to sell forward cost us a lot of money. I think that...

Q: Alpha and Omega are U.S. corporations. Alpha has

Alpha and Omega are U.S. corporations. Alpha has a plant in Hamburg that imports components from the United States, assembles them, and then sells the finished product in Germany. Omega is at the oppo...

Q: Zip purchased merchandise from Tas of Japan on November 1, 2016

Zip purchased merchandise from Tas of Japan on November 1, 2016, for 10,000,000 yen, payable on December 1, 2016. The spot rate for yen on November 1 was $0.0075, and on December 1 the spot rate was $...

Q: Sho of New York is an international dealer in jewelry and engages

Sho of New York is an international dealer in jewelry and engages in numerous import and export activities. Sho’s receivables and payables in foreign currency units before year-end a...

Q: Wil has 100,000 units of widgets in its inventory on

Wil has 100,000 units of widgets in its inventory on October 1, 2016. Wil purchased them for $1 per unit one month ago. It hedges the value of the widgets by entering into a forward contract to sell 1...

Q: On December 12, 2016, Car entered into three forward exchange

On December 12, 2016, Car entered into three forward exchange contracts, each to purchase 100,000 Canadian dollars in 90 days. Assume a 12 percent interest rate. The relevant exchange rates are as fol...

Q: On April 1, 2016, Win of Canada ordered customized fittings

On April 1, 2016, Win of Canada ordered customized fittings from Ace, a U.S. firm, to be delivered on May 31, 2016, at a price of 50,000 Canadian dollars. The spot rate for Canadian dollars on April 1...

Q: On December 1, 2016, Jol Company enters into a 90

On December 1, 2016, Jol Company enters into a 90-day forward contract with a rice speculator to purchase 500 tons of rice at $1,000 per ton. Jol enters into this contract in order to hedge an anticip...

Q: Refer to Exercise E 13-1 and assume that Jol enters

Refer to Exercise E 13-1 and assume that Jol enters into the forward contract to hedge a firm purchase commitment. Repeat parts 1 and 2 under this assumption. Data from Exercise E 13-1 On December 1...

Q: Refer to Problem P 13-3 and assume that instead of

Refer to Problem P 13-3 and assume that instead of initially signing a variable-rate loan, Cam receives a fixed rate of 8 percent on the loan on January 1, 2016. Instead of entering into a pay-fixed,...

Q: Bat, a U.S. corporation, anticipates a contract

Bat, a U.S. corporation, anticipates a contract based on December 2, 2016, discussions to sell heavy equipment to Ram of Scotland for 500,000 British pounds. The equipment is likely to be delivered an...

Q: Mar, a U.S. firm, purchased equipment for

Mar, a U.S. firm, purchased equipment for 400,000 British pounds from Thc on December 16, 2016. The terms were n/30, payable in British pounds. On December 16, 2016, Mar also entered into a 30-day for...

Q: NGW, a consumer gas provider, estimates a rather cold winter

NGW, a consumer gas provider, estimates a rather cold winter. As a result it decides to enter into a futures contract on the NYMEX for natural gas on November 2, 2016. The trading unit is 10,000 milli...

Q: Ins makes sophisticated medical equipment. A key component of the equipment

Ins makes sophisticated medical equipment. A key component of the equipment is Grade A silver. On May 1, 2016, Ins enters into a firm purchase agreement to buy 1,200,000 troy ounces (equal to 100,000...

Q: On January 1, 2016, Cam borrows $400,000

On January 1, 2016, Cam borrows $400,000 from Ven. The five-year term note is a variable-rate one in which the 2016 interest rate is determined to be 8 percent, the LIBOR rate at January 1, 2016, +2%....

Q: Interest rate swaps were used in the chapter to highlight the differences

Interest rate swaps were used in the chapter to highlight the differences between fair-value and cash-flow hedge accounting. Explain what type of risk is being hedged when a receive-fixed, pay-variabl...

Q: Explain the circumstances under which fair-value hedge accounting should be

Explain the circumstances under which fair-value hedge accounting should be used and when cash-flow hedge accounting should be used.

Q: ASC 815 allows companies to account for certain hedges of existing foreign

ASC 815 allows companies to account for certain hedges of existing foreign currency–denominated receivables and payables as cash-flow hedges. Also in ASC 815, hedges of existing assets and liabilities...

Q: Explain the objective of hedge accounting and how this objective should improve

Explain the objective of hedge accounting and how this objective should improve the transparency of financial statements.

Q: Hedge effectiveness must be documented before a particular hedge qualifies for hedge

Hedge effectiveness must be documented before a particular hedge qualifies for hedge accounting. Describe the most common approaches used to determine hedge effectiveness and when they are appropriate...

Q: A hedged firm purchase or sale commitment typically qualifies for fair-

A hedged firm purchase or sale commitment typically qualifies for fair-value hedge accounting if the hedge is documented to be effective. Compare the accounting for both the derivative and the firm pu...

Q: Interest rate swaps were used in the chapter to highlight the differences

Interest rate swaps were used in the chapter to highlight the differences between fair-value and cash-flow hedge accounting. Explain what type of risk is being hedged when a pay-fixed, receive variabl...

Q: 1. A German subsidiary of a U.S. firm

1. A German subsidiary of a U.S. firm has the British pound as its functional currency. Under the provisions of ASC Topic 830, the U.S. dollar from the subsidiary’s viewpoint would be: a Its local cur...

Q: How does the choice of functional currency affect how the gain or

How does the choice of functional currency affect how the gain or loss on a hedge of a net investment in a foreign subsidiary is reported in the financial statements?

Q: Wealthy investors often invest in hedge funds. Hedge fund managers use

Wealthy investors often invest in hedge funds. Hedge fund managers use investors’ money to buy stocks, bonds, and other investments with the intention of earning high returns. But an article in the Ne...

Q: Toledo Tool Company (TTC) manufactures a line of electric garden

Toledo Tool Company (TTC) manufactures a line of electric garden tools that are s old in general hardware stores. The company’s controller, Will Fulton, has just received the sales f...

Q: We discussed in this chapter how the balanced scorecard identifies four categories

We discussed in this chapter how the balanced scorecard identifies four categories of organizational effectiveness criteria. Community-related measures of effectiveness, such as satisfaction with serv...

Q: Over the past few decades, hedge funds have become among the

Over the past few decades, hedge funds have become among the most controversial and largest investment vehicles on Wall Street. Critics of hedge funds argue that their high-risk investment strategies...

Q: There are a variety of reasons that companies may use derivative financial

There are a variety of reasons that companies may use derivative financial instruments. Some use derivatives so that the risk of financial operations can be controlled, whereas others attempt to manag...

Q: Assume that you have just been hired as a financial analyst by

Assume that you have just been hired as a financial analyst by Triple Play Inc., a mid-sized California company that specializes in creating high-fashion clothing. Because no one at Triple Play is fam...

Q: Assume you have just been hired as a financial analyst by Tennessee

Assume you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized Tennessee company that specializes in creating exotic sauces from imported fruits and vegetables. The fir...

Q: The Zinn Company plans to issue $10,000,000

The Zinn Company plans to issue $10,000,000 of 20-year bonds in June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, and the cu...

Q: Stohs Semiconductor Corporation plans to issue $50 million of 20-

Stohs Semiconductor Corporation plans to issue $50 million of 20-year bonds in 6 months. The interest rate would be 9% if the bonds were issued today. How can Stohs set up a hedge against an increase...

Q: Suppose IBM signed a contract to buy a supply of computer chips

Suppose IBM signed a contract to buy a supply of computer chips from a German firm. The price is 10 million euros, and the chips will be delivered immediately, but IBM can delay payment for 6 months i...

Q: Mark Sexton and Todd Story, the owners of S&S

Mark Sexton and Todd Story, the owners of S&S Air, have been in discussions with a light aircraft dealer in Monaco about selling the company’s planes in Europe. Jarek Jachowicz, the dealer, wants to a...

Q: Back on January 16, 2003, after more than 23 years

Back on January 16, 2003, after more than 23 years, General Electric (GE) Co. decided to dump its well-recognized slogan, “We Bring Good Things to Life,” and decided to spend more than $100 million to...

Q: What distinguishes a hedge fund from other types of mutual funds?

What distinguishes a hedge fund from other types of mutual funds?

Q: Chicago Bank and Trust has $100 million in assets and $

Chicago Bank and Trust has $100 million in assets and $83 million in liabilities. The duration of the assets is 5.9 years, and the duration of the liabilities is 1.8 years. How many futures contracts...

Q: Springer County Bank has assets totaling $180 million with a duration

Springer County Bank has assets totaling $180 million with a duration of five years, and liabilities totaling $160 million with a duration of two years. Bank management expects interest rates to fall...

Q: A banker commits to a two-year $5,000

A banker commits to a two-year $5,000,000 commercial loan and expects to fulfill the agreement in 30 days. The interest rate will be determined at that time. Currently, rates are 7.5% for such loans....

Q: If your company has to make a 10 million euros payment to

If your company has to make a 10 million euros payment to a German company in June, three months from now, how would you hedge the foreign exchange risk in this payment with a 125,000 euros futures co...

Q: Suppose that your company will be receiving 30 million euros six months

Suppose that your company will be receiving 30 million euros six months from now and the euro is currently selling for 1 euro per dollar. If you want to hedge the foreign exchange risk in this payment...

Q: A bank customer will be going to London in June to purchase

A bank customer will be going to London in June to purchase £100,000 in new inventory. The current spot and futures exchange rates are as follows: Exchange Rates Dollars/Pound Period…………………….Rate Sp...

Q: If the portfolio you manage is holding $25 million of 6s

If the portfolio you manage is holding $25 million of 6s of 2032 Treasury bonds with a price of 110, what forward contract would you enter into to hedge the interest-rate risk on these bonds over the...

Q: If your company has a payment of 200 million euros due one

If your company has a payment of 200 million euros due one year from now, how would you hedge the foreign exchange risk in this payment with 125,000 euros futures contracts?

Q: The portfolio manager of a hedge fund believes that stock A is

The portfolio manager of a hedge fund believes that stock A is undervalued and stock B is overvalued. Currently their prices are $30 and $30, respectively. The portfolio manager of the fund buys 100 s...

Q: In October 2009, Ares Capital Corporation (ARCC) announced that

In October 2009, Ares Capital Corporation (ARCC) announced that it was acquiring Allied Capital (ALD). The terms of the acquisition specified that one share of ALD would become 0.325 share of ARCC. Pr...

Q: Why are hedge funds and private equity funds of little interest to

Why are hedge funds and private equity funds of little interest to most investors?

Q: A hedge fund is currently engaged in a plain vanilla euro swap

A hedge fund is currently engaged in a plain vanilla euro swap in which it pays euros at the euro floating rate of Erabor and receives euros fixed. It would like to convert this position into one in w...

Q: You are the treasurer of a firm that will need to borrow

You are the treasurer of a firm that will need to borrow $10 million at LIBOR plus 2.5 points in 45 days. The loan will have a maturity of 180 days, at which time all the interest and principal will b...

Q: Explain how a bank could use a swaption to hedge the possibility

Explain how a bank could use a swaption to hedge the possibility that it will enter into a pay floating, receive-fixed swap at a later date.

Q: Use the information in problem 9 to set up a dynamic hedge

Use the information in problem 9 to set up a dynamic hedge using stock index futures Assume a multiplier of 500. The futures price is 496.29. The volatility is 17.5 percent. The continuously compounde...

Q: Suppose you own 50,000 shares of stock valued at $

Suppose you own 50,000 shares of stock valued at $35.50 per share. You are interested in protecting it with a put that would have a delta of 0.62. Assume however, that the put is not available or is u...

Q: ACB, Inc., engages in a forward transaction and is applying

ACB, Inc., engages in a forward transaction and is applying fair value hedge accounting. ACB holds the underlying instrument and hedges it by selling this forward contract. During the hedge period, th...

Q: Explain how cash flow hedge accounting is applied in principle.

Explain how cash flow hedge accounting is applied in principle. Specifically, identify how this accounting treatment is different from the typical way cash flow transactions accounting is handled.

Q: Why is hedge accounting used, and how can it be misused

Why is hedge accounting used, and how can it be misused?

Q: Explain how an organization determines whether a hedge is sufficiently effective to

Explain how an organization determines whether a hedge is sufficiently effective to justify hedge accounting.

Q: Consider a European call with an exercise price of 50 on a

Consider a European call with an exercise price of 50 on a stock priced at 60. The stock can go up by 15 percent or down by 20 percent in each of two binomial periods. The risk-free rate is 10 percent...

Q: In this chapter, we obtained the binomial option pricing formula by

In this chapter, we obtained the binomial option pricing formula by hedging a short position in the call option with a long position in stock. An alternative way to do this is to combine the stock and...

Q: Consider a stock worth $25 that can go up or down

Consider a stock worth $25 that can go up or down by 15 percent per period. The risk-free rate is 10 percent. Use one binomial period. a. Determine the two possible stock prices for the next period....

Q: Consider a two-period, two-state world. Let

Consider a two-period, two-state world. Let the current stock price be 45 and the risk-free rate be 5 percent. Each period the stock price can go either up by 10 percent or down by 10 percent. A call...

Q: Consider a riskless spread with a long position in the August 160

Consider a riskless spread with a long position in the August 160 call and a short position in the October 160 call. Determine the appropriate hedge ratio. Then show how a $1 stock price increase woul...

Q: Show how a delta hedge using a position in the stock and

Show how a delta hedge using a position in the stock and a long position in a put would be set up?

Q: What factors contribute to the difficulty of making a delta hedge be

What factors contribute to the difficulty of making a delta hedge be truly risk-free?

Q: On July 1, a portfolio manager holds $1 million face

On July 1, a portfolio manager holds $1 million face value of Treasury bonds, the 11 l/4s maturing in about 29 years. The price is 107 14/32. The bond will need to be sold on August 30. The manager is...

Q: Suppose you are concerned about your firm’s jet fuel exposure. Further

Suppose you are concerned about your firm’s jet fuel exposure. Further, your analysis suggests the best futures contract to hedge jet fuel is unleaded gasoline. The fuel volatility (standard deviation...

Q: The price sensitivity hedge ratio, including yield beta, was shown

The price sensitivity hedge ratio, including yield beta, was shown in this chapter to be Discuss how changing each of the five input parameters will influence the hedge ratio (assume that all input pa...

Q: You are the manager of a stock portfolio. On October 1

You are the manager of a stock portfolio. On October 1, your holdings consist of the eight stocks listed in the following table, which you intend to sell on December 31. You are concerned about a mark...

Q: On March 1, a securities analyst recommended General Cinema stock as

On March 1, a securities analyst recommended General Cinema stock as a good purchase in the early summer. The portfolio manager plans to buy 20,000 shares of the stock on June 1 but is concerned that...

Q: You plan to buy 1,000 shares of Swiss International Airlines

You plan to buy 1,000 shares of Swiss International Airlines stock. The current price is SF950. The current exchange rate is $0.7254/SF. You are interested in speculating on the stock but do not want...

Q: Suppose you are a dealer in sugar. It is September 26

Suppose you are a dealer in sugar. It is September 26, and you hold 112,000 pounds of sugar worth $0.0479 per pound. The price of a futures contract expiring in January is $0.0550 per pound. Each cont...

Q: a. Define the minimum variance hedge ratio and the measure of

a. Define the minimum variance hedge ratio and the measure of hedging effectiveness. What do these two values tell you? b. What is the price sensitivity hedge ratio? How are the price sensitivity an...

Q: For each of the following situations, determine whether a long or

For each of the following situations, determine whether a long or short hedge is appropriate. Justify your answers. a. A firm anticipates issuing stock in three months. b. An investor plans to buy a...

Q: On June 17 of a particular year, an American watch dealer

On June 17 of a particular year, an American watch dealer decided to import 100,000 Swiss watches. Each watch costs SF225. The dealer would like to hedge against a change in the dollar/Swiss franc exc...

Q: On January 2 of a particular year, an American firm decided

On January 2 of a particular year, an American firm decided to close out its account at a Canadian bank on February 28. The firm is expected to have 5 million Canadian dollars in the account at the ti...

Q: Assume a standard deviation of 8 percent and use the Black model

Assume a standard deviation of 8 percent and use the Black model to determine whether the call option in problem 17 is correctly priced. If not, suggest a riskless hedge strategy.

Q: Under what circumstances can inventory be used as a hedge against inflation

Under what circumstances can inventory be used as a hedge against inflation?

Q: Mosbee Designs uses a job order costing system to account for the

Mosbee Designs uses a job order costing system to account for the various architectural services offered to commercial clients. For each major job, architectural models of the completed structures are...

Q: A forward exchange contract may be used (a) to

A forward exchange contract may be used (a) to manage an exposed foreign currency position, (b) to hedge an identifiable foreign currency commitment, (c) to hedge a forecasted foreign currency tra...

Q: Rainy Day Insurance Company maintains an extensive portfolio of bond investments classified

Rainy Day Insurance Company maintains an extensive portfolio of bond investments classified as available-for-sale securities under ASC 320. The bond investments have a variety of fixed interest rates...

Q: Nick Andros of Streamline Company suggested that the company speculate in foreign

Nick Andros of Streamline Company suggested that the company speculate in foreign currency as a partial hedge against its operations in the cattle market, which fluctuates like a commodity market. On...

Q: Select the correct answer for each of the following questions.

Select the correct answer for each of the following questions. 1. The following information applies to Denton Inc.’s sale of 10,000 foreign currency units under a forward co...

Q: Pumped Up Company purchased equipment from Switzerland for 140,000 francs

Pumped Up Company purchased equipment from Switzerland for 140,000 francs on December 16, 20X7, with payment due on February 14, 20X8. On December 16, 20X7, Pumped Up also acquired a 60-day forward co...

Q: On November 1, 20X6, Smith Imports Inc. contracted to

On November 1, 20X6, Smith Imports Inc. contracted to purchase teacups from England for £30,000. The teacups were to be delivered on January 30, 20X7, with payment due on March 1, 20X7. O...

Q: Match the items in the left-hand column with the descriptions

Match the items in the left-hand column with the descriptions/explanations in the right-hand column.

Q: On December 1, 20X1, Micro World Inc. entered into

On December 1, 20X1, Micro World Inc. entered into a 120-day forward contract to purchase 100,000 Australian dollars (A$). Micro World’s fiscal year ends on December 31. The direct e...

Q: Part I Maple Company had the following export and import transactions

Part I Maple Company had the following export and import transactions during 20X5: On March 1, Maple sold goods to a Canadian company for C$30,000, receivable on May 30. The spot rates for Canadi...

Q: Select the correct answer for each of the following questions.

Select the correct answer for each of the following questions. According to ASC 815, which of the following is not an underlying? A security price. A monthly average temperature. The pri...

Q: Mega Company believes the price of oil will increase in the coming

Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices...

Q: On November 3, 20X2, PRD Corporation acquired 100 shares of

On November 3, 20X2, PRD Corporation acquired 100 shares of JRS Company at a cost of $12 per share. PRD classifies them as available-for-sale securities. On this same date, PRD decides to hedge agains...

Q: Kiwi Painting Company engages in a number of foreign currency transactions in

Kiwi Painting Company engages in a number of foreign currency transactions in euros (€). For each of the following independent transactions, determine the dollar amount to be reported...

Q: The following information should be used for questions 1, 2,

The following information should be used for questions 1, 2, and 3. Select the best answers under each of two alternative assumptions: (a) the LCU is the functional currency and the translation meth...

Q: A portfolio manager plans to use a Treasury bond futures contract to

A portfolio manager plans to use a Treasury bond futures contract to hedge a bond portfolio over the next 3 months. The portfolio is worth $100 million and will have a duration of 4.0 years in 3 month...

Q: Calculate the value of 9-month American call option to buy

Calculate the value of 9-month American call option to buy 1 million units of a foreign currency using a three-step binomial tree. The current exchange rate is 0.79 and the strike price is 0.80 (both...

Q: A company uses delta hedging to hedge a portfolio of long positions

A company uses delta hedging to hedge a portfolio of long positions in put and call options on a currency. Which of the following would give the most favorable result? (a) A virtually constant spot ra...

Q: (a) Hedge funds earn a management fee plus an incentive

(a) Hedge funds earn a management fee plus an incentive fee that is a percentage of the profits, if any, that they generate (see Business Snapshot 1.3). How is a fund manager motivated to behave with...

Q: Repeat Problem 19.12 for a financial institution with a portfolio

Repeat Problem 19.12 for a financial institution with a portfolio of short positions in put and call options on a currency. Data from Problem 19.12: A company uses delta hedging to hedge a portfolio o...

Q: Sixty futures contracts are used to hedge an exposure to the price

Sixty futures contracts are used to hedge an exposure to the price of silver. Each futures contract is on 5,000 ounces of silver. At the time the hedge is closed out, the basis is $0.20 per ounce. Wha...

Q: A trader owns 55,000 units of a particular asset and

A trader owns 55,000 units of a particular asset and decides to hedge the value of her position with futures contracts on another related asset. Each futures contract is on 5,000 units. The spot price...

Q: A U.S. company knows it will have to pay

A U.S. company knows it will have to pay 3 million euros in three months. The current exchange rate is 1.1500 dollars per euro. Discuss how forward and options contracts can be used by the company to...

Q: Describe how foreign currency options can be used for hedging in

Describe how foreign currency options can be used for hedging in the situation considered in Section 1.7 so that (a) ImportCo is guaranteed that its exchange rate will be less than 1.4700, and (b) Exp...

Q: A company wishes to hedge its exposure to a new fuel whose

A company wishes to hedge its exposure to a new fuel whose price changes have a 0.6 correlation with gasoline futures price changes. The company will lose $1 million for each 1 cent increase in the pr...

Q: The following table gives data on monthly changes in the spot price

The following table gives data on monthly changes in the spot price and the futures price for a certain commodity. Use the data to calculate a minimum variance hedge ratio. (Do not make an adjustment...

Q: Explain how corporations can use range forward contracts to hedge their foreign

Explain how corporations can use range forward contracts to hedge their foreign exchange risk when they are due to receive a certain amount of a foreign currency in the future.

Q: Under what circumstances does a minimum variance hedge portfolio lead to no

Under what circumstances does a minimum variance hedge portfolio lead to no hedging at all?

Q: Suppose that the standard deviation of quarterly changes in the prices of

Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.65, the standard deviation of quarterly changes in a futures price on the commodity is $0.81, and the coeffi...

Q: A company has a $20 million portfolio with a beta of

A company has a $20 million portfolio with a beta of 1.2. It would like to use futures contracts on a stock index to hedge its risk. The index futures price is currently standing at 1080, and each con...

Q: ‘‘If the minimum variance hedge ratio is calculated as 1.

‘‘If the minimum variance hedge ratio is calculated as 1.0, the hedge must be perfect.’’ Is this statement true? Explain your answer.

Q: The standard deviation of monthly changes in the spot price of live

The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.2. The standard deviation of monthly changes in the futures price of live cattle for the closest co...

Q: In the corn futures contract traded on an exchange, the following

In the corn futures contract traded on an exchange, the following delivery months are available: March, May, July, September, and December. Which of the available contracts should be used for hedging...

Q: Does a perfect hedge always succeed in locking in the current spot

Does a perfect hedge always succeed in locking in the current spot price of an asset for a future transaction? Explain your answer.

Q: Suppose that a bond portfolio with a duration of 12 years is

Suppose that a bond portfolio with a duration of 12 years is hedged using a futures contract in which the underlying asset has a duration of 4 years. What is likely to be the impact on the hedge of th...

Q: It is January 30. You are managing a bond portfolio worth

It is January 30. You are managing a bond portfolio worth $6 million. The duration of the portfolio in 6 months will be 8.2 years. The September Treasury bond futures price is currently 108-15, and th...

Q: A fund manager has a portfolio worth $50 million with a

A fund manager has a portfolio worth $50 million with a beta of 0.87. The manager is concerned about the performance of the market over the next 2 months and plans to use 3-month futures contracts on...

Q: Suppose that the 1-year gold lease rate is 1.

Suppose that the 1-year gold lease rate is 1.5% and the 1-year risk-free rate is 5.0%. Both rates are compounded annually. Use the discussion in Business Snapshot 3.1 to calculate the maximum 1-year g...

Q: Explain what is meant by a perfect hedge. Does a perfect

Explain what is meant by a perfect hedge. Does a perfect hedge always lead to a better outcome than an imperfect hedge? Explain your answer.

Q: Give three reasons why the treasurer of a company might not hedge

Give three reasons why the treasurer of a company might not hedge the company’s exposure to a particular risk.

Q: A U.S. company is interested in using the futures

A U.S. company is interested in using the futures contracts traded by the CME Group to hedge its Australian dollar exposure. Define r as the interest rate (all maturities) on the U.S. dollar and rf as...

Q: Suppose that it is February 20 and a treasurer realizes that on

Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with a maturity of 180 days. If the paper were issued today, the c...

Q: The volatility of a non-dividend-paying stock whose price

The volatility of a non-dividend-paying stock whose price is $78, is 30%. The risk-free rate is 3% per annum (continuously compounded) for all maturities. Calculate values for u, d, and p when a 2-mon...

Q: The treasurer of a corporation is trying to choose between options and

The treasurer of a corporation is trying to choose between options and forward contracts to hedge the corporation’s foreign exchange risk. Discuss the advantages and disadvantages of each.

Q: It is now October 2017. A company anticipates that it will

It is now October 2017. A company anticipates that it will purchase 1 million pounds of copper in each of February 2018, August 2018, February 2019, and August 2019. The company has decided to use the...

Q: Under what circumstances are (a) a short hedge and (

Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?

Q: Suppose that in Example 3.2 of Section 3.3

Suppose that in Example 3.2 of Section 3.3 the company decides to use a hedge ratio of 0.8. How does the decision affect the way in which the hedge is implemented and the result?

Q: In Problem 13.19, suppose a trader sells 10,

In Problem 13.19, suppose a trader sells 10,000 European call options and the two-step tree describes the behavior of the stock. How many shares of the stock are needed to hedge the 6-month European c...

Q: ‘‘If there is no basis risk, the minimum variance hedge

‘‘If there is no basis risk, the minimum variance hedge ratio is always 1.0.’’ Is this statement true? Explain your answer.

Q: A corn farmer argues ‘‘I do not use futures contracts for

A corn farmer argues ‘‘I do not use futures contracts for hedging. My real risk is not the price of corn. It is that my whole crop gets wiped out by the weather.’’ Discuss this viewpoint. Should the f...

Q: Suppose that in Table 3.5 the company decides to use

Suppose that in Table 3.5 the company decides to use a hedge ratio of 1.5. How does the decision affect the way the hedge is implemented and the result?

Q: In 2006, twenty- seven parties became limited partners in two

In 2006, twenty- seven parties became limited partners in two hedge funds that had invested with Bernard Madoff and his investment firm. The partners’ investment adviser gave them various investment i...

Q: A derivative used as an economic hedge of foreign currency risk associated

A derivative used as an economic hedge of foreign currency risk associated with a foreign currency–denominated asset or liability is not accounted for as a hedge under the provisions of FASB ASC Topic...

Q: When does partial hedge ineffectiveness occur?

When does partial hedge ineffectiveness occur?

Q: Two affiliates of a hugely successful hedge fund, SAC Capital Advisors

Two affiliates of a hugely successful hedge fund, SAC Capital Advisors, were charged with insider trading by the SEC. CR Intrinsic Investors and Sigma Capital Management apparently relied on expert ne...

Q: Refer to Table 25.2 in the text to answer this

Refer to Table 25.2 in the text to answer this question. Suppose today is January 8, 2015, and your firm produces breakfast cereal and needs 140,000 bushels of corn in March 2015 for an upcoming pro...

Q: If a U.S. company exports its goods to Japan

If a U.S. company exports its goods to Japan, how would it use a futures contract on Japanese yen to hedge its exchange rate risk? Would it buy or sell yen futures? Does the way the exchange rate is q...

Q: Kevin Nomura is a Japanese student who is planning a one-

Kevin Nomura is a Japanese student who is planning a one-year stay in the United States. He expects to arrive in the United States in eight months. He is worried about depreciation of the yen relative...

Q: Bubbling Crude Corporation, a large Texas oil producer, would like

Bubbling Crude Corporation, a large Texas oil producer, would like to hedge against adverse movements in the price of oil because this is the firm’s primary source of revenue. What should the firm do?...

Q: If a textile manufacturer wanted to hedge against adverse movements in cotton

If a textile manufacturer wanted to hedge against adverse movements in cotton prices, it could buy cotton futures contracts or buy call options on cotton futures contracts. What would be the pros and...

Q: Portofi no Company made purchases on account from three foreign suppliers on

Portofi no Company made purchases on account from three foreign suppliers on December 15, 2012, with payment made on January 15, 2013. Information related to these purchases is as follows: Portofi...

Q: On June 1, Year 1, Tsanumis Corporation (a U

On June 1, Year 1, Tsanumis Corporation (a U.S.-based manufacturing fi rm) received an order to sell goods to a foreign customer at a price of 1 million euros. The goods will be shipped and payment wi...

Q: The Zermatt Company ordered parts from a foreign supplier on November 20

The Zermatt Company ordered parts from a foreign supplier on November 20 at a price of 100,000 francs when the spot rate was $0.80 per peso. Delivery and payment were scheduled for December 20. On Nov...

Q: Given its experience, Garnier Corporation expects that it will sell goods

Given its experience, Garnier Corporation expects that it will sell goods to a foreign customer at a price of 1 million lire on March 15, Year 2. To hedge this forecasted transaction, a three-month pu...

Q: Assuming a forward contract to sell 100,000 Israeli shekels was

Assuming a forward contract to sell 100,000 Israeli shekels was entered into on December 1, Year 1, as a fair value hedge of a foreign currency receivable, what would be the net impact on net income i...

Q: What was the net impact on Keefer Company’s Year 1 income as

What was the net impact on Keefer Company’s Year 1 income as a result of this fair value hedge of a firm commitment? a. $0. b. An $860.60 decrease in income. c. An $1,100.00 increase in income. d. A $...

Q: What was the net increase or decrease in cash flow from having

What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? a. $0. b. A $1,000 increase in cash flow. c. A $1,...

Q: What is the net impact on Black Lion Company’s Year 1 net

What is the net impact on Black Lion Company’s Year 1 net income as a result of this hedge of a forecasted foreign currency purchase? a. $0. b. A $200 increase in net income. c. A $300 decrease in net...

Q: Better Food Corporation (BFC) regularly purchases nutritional supplements from a

Better Food Corporation (BFC) regularly purchases nutritional supplements from a supplier in Japan with the invoice price denominated in Japanese yen. BFC has experienced several foreign exchange loss...

Q: Refer to the following information provided in the chapter for Arcot Company

Refer to the following information provided in the chapter for Arcot Company: • Consolidated financial statements in Exhibits 10.8 and 10.9. • Differences between L...

Q: Refer to the following information provided in the chapter for Arcot Company

Refer to the following information provided in the chapter for Arcot Company: • Consolidated financial statements in Exhibits 10.8 and 10.9. • Differences between L...

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a cash flow hedge of (a) a foreign-currency-denominated asset or liability and (b) a forecasted foreign currency transaction?

Q: What does the word hedging mean? Why do companies hedge foreign

What does the word hedging mean? Why do companies hedge foreign exchange risk?

Q: How are gains and losses on foreign currency borrowings used to hedge

How are gains and losses on foreign currency borrowings used to hedge the net investment in a foreign subsidiary reported in the consolidated financial statements?

Q: Why might a company want to hedge its balance sheet exposure?

Why might a company want to hedge its balance sheet exposure? What is the paradox associated with hedging balance sheet exposure?

Q: What is the net impact on Black Lion Company’s Year 2 net

What is the net impact on Black Lion Company’s Year 2 net income as a result of this hedge of a forecasted foreign currency purchase? Assume that the raw materials are consumed and become a part of co...

Q: What was the net impact on Keefer Company’s Year 2 income as

What was the net impact on Keefer Company’s Year 2 income as a result of this fair value hedge of a firm commitment? a. $0. b. An $839.40 decrease in income. c. A $74,160.60 increase in income. d. A $...

Q: The functional currency of Garland Inc.’s Japanese subsidiary is the

The functional currency of Garland Inc.’s Japanese subsidiary is the Japanese yen. Garland borrowed Japanese yen as a partial hedge of its investment in the subsidiary. How should the transaction gain...

Q: What is hedge accounting?

What is hedge accounting?

Q: Under what conditions can hedge accounting be used to account for a

Under what conditions can hedge accounting be used to account for a foreign currency option used to hedge a forecasted foreign currency transaction?

Q: Refer to Exhibits 6.3, 6.5, 6

Refer to Exhibits 6.3, 6.5, 6.7, 6.8, and 6.12. Required: Identify a. An issue in respect of which the practices of several countries discussed in this chapter are at variance with IFRS. b. The most...

Q: Zorba Company, a U.S.-based importer of specialty

Zorba Company, a U.S.-based importer of specialty olive oil, placed an order with a foreign supplier for 500 cases of olive oil at a price of 100 crowns per case. The total purchase price is 50,000 cr...

Q: The Budvar Company sells parts to a foreign customer on December 1

The Budvar Company sells parts to a foreign customer on December 1, Year 1, with payment of 20,000 crowns to be received on March 1, Year 2. Budvar enters into a forward contract on Decemb...

Q: The same facts apply as in Exercise 14 except that Budvar Company

The same facts apply as in Exercise 14 except that Budvar Company purchases parts from a foreign supplier on December 1, Year 1, with payment of 20,000 crowns to be made on March 1, Year 2. On Decembe...

Q: On November 1, Year 1, Alexandria Company sold merchandise to

On November 1, Year 1, Alexandria Company sold merchandise to a foreign customer for 100,000 francs with payment to be received on April 30, Year 2. At the date of sale, Alexandria Company entered int...

Q: Artco Inc. engages in various transactions with companies in the country

Artco Inc. engages in various transactions with companies in the country of Santrica. On November 30, Year 1, Artco sold artwork at a price of 400,000 ricas to a Santrican customer, with payment to be...

Q: On October 1, Year 1, Butterworth Company entered into a

On October 1, Year 1, Butterworth Company entered into a forward contract to sell 100,000 rupees in four months (on January 31, Year 2). Relevant exchange rates for the rupee are as follows: Butterw...

Q: On August 1, Year 1, Huntington Corporation placed an order

On August 1, Year 1, Huntington Corporation placed an order to purchase merchandise from a foreign supplier at a price of 100,000 dinars. The merchandise is received and paid for on October 31, Year 1...

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as (a) a cash flow hedge and (b) a fair value hedge of a foreign-currency-denominated asset or liability?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a fair value hedge of (a) a foreign-currency-denominated asset or liability and (b) a foreign currency firm commitment?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a fair value hedge of (a) a foreign currency denominated asset or liability and (b) a foreign currency firm commitment?

Q: What are the differences in accounting for a forward contract used as

What are the differences in accounting for a forward contract used as a cash flow hedge of (a) a foreign currency denominated asset or liability and (b) a forecasted foreign currency transaction?

Q: MNC Corp. (a U.S.-based company)

MNC Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2017, with payment of 10 million South Korean won to be received on March 31, 2018. The following exchange rates a...

Q: On March 1, Pimlico Corporation (a U.S.-

On March 1, Pimlico Corporation (a U.S.-based company) expects to order merchandise from a supplier in Sweden in three months. On March 1, when the spot rate is $0.10 per Swedish krona, Pimlico enters...

Q: Torres Corporation (a U.S.-based company) expects

Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 100,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchase...

Q: On September 1, 2017, Jensen Company received an order to

On September 1, 2017, Jensen Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. Jensen shipped the machine and received payment on March 1, 201...

Q: On September 1, 2017, Jensen Company received an order to

On September 1, 2017, Jensen Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. Jensen shipped the machine and received payment on March 1, 201...

Q: On September 1, 2017, Jensen Company received an order to

On September 1, 2017, Jensen Company received an order to sell a machine to a customer in Canada at a price of 100,000 Canadian dollars. Jensen shipped the machine and received payment on March 1, 201...

Q: On June 1, 2017, Micro Corp. received an order

On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican pe...

Q: On June 1, 2017, Micro Corp. received an order

On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican pe...

Q: On June 1, 2017, Micro Corp. received an order

On June 1, 2017, Micro Corp. received an order for parts from a Mexican customer at a price of 1,000,000 Mexican pesos with a delivery date of July 31, 2017. On June 1, when the U.S. dollar–Mexican pe...

Q: On November 1, 2017, Dos Santos Company forecasts the purchase

On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pa...

Q: On November 1, 2017, Dos Santos Company forecasts the purchase

On November 1, 2017, Dos Santos Company forecasts the purchase of raw materials from a Brazilian supplier on February 1, 2018, at a price of 200,000 Brazilian reals. On November 1, 2017, Dos Santos pa...

Q: St. Philip Company ordered parts costing €100,000 from

St. Philip Company ordered parts costing €100,000 from a foreign supplier on January 15 when the spot rate was $0.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at...

Q: The functional currency of Bertrand, Inc.’s Irish subsidiary is

The functional currency of Bertrand, Inc.’s Irish subsidiary is the euro. Bertrand borrowed euros as a partial hedge of its investment in the subsidiary. Since then, the euro has decreased in value. B...

Q: On February 1, 2017, Linber Company forecasted the purchase of

On February 1, 2017, Linber Company forecasted the purchase of component parts on May 1, 2017, at a price of 100,000 euros. On that date, Linber entered into a forward contract to purchase 100,000 eur...

Q: Palmetto Bug Extermination Corporation (PBEC), a U.S.

Palmetto Bug Extermination Corporation (PBEC), a U.S. company, regularly purchases chemicals from a supplier in Switzerland with the invoice price denominated in Swiss francs. PBEC has experienced sev...

Q: The Pier Ten Company, a U.S. company,

The Pier Ten Company, a U.S. company, made credit sales to four customers in Asia on September 15, 2015, and received payment on October 15, 2015. Information related to these sales is as follows The...

Q: Brandlin Company of Anaheim, California, sells parts to a foreign

Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 16,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract...

Q: Use the same facts as in Problem 31 except that Brandlin Company

Use the same facts as in Problem 31 except that Brandlin Company purchases materials from a foreign supplier on December 1, 2017, with payment of 16,000 korunas to be made on March 1, 2018. The materi...

Q: On June 1, Alexander Corporation sold goods to a foreign customer

On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,000,000 pesos and will receive payment in three months on September 1. On June 1, Alexander acquired an option to sell...

Q: On June 1, Cairns Corporation purchased goods from a foreign supplier

On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on September 1. On June 1, Cairns acquired an option to purch...

Q: On November 1, 2017, Bernard Company (a U.

On November 1, 2017, Bernard Company (a U.S.-based company) sold merchandise to a foreign customer for 100,000 FCUs with payment to be received on April 30, 2018. At the date of sale, Bernard entered...

Q: Eximco Corporation (based in Champaign, Illinois) has a number

Eximco Corporation (based in Champaign, Illinois) has a number of transactions with companies in the country of Mongagua, where the currency is the mong. On November 30, 2017, Eximco sold equipment at...

Q: On October 1, 2017, Sharp Company (based in Denver

On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 100,000 rubles in four months (on January 31, 2018) and receive $39,000 in U.S. dollars. Exchange...

Q: On August 1, Ling-Harvey Corporation (a U.

On August 1, Ling-Harvey Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 ringgits. Ling-Harvey will receive and make payment f...

Q: On June 1, Vandervelde Corporation (a U.S.-

On June 1, Vandervelde Corporation (a U.S.-based manufacturing firm) received an order to sell goods to a foreign customer at a price of 100,000 leks. Vandervelde will ship the goods and receive payme...

Q: Spitz Company ordered merchandise from a foreign supplier on November 20 at

Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 100,000 forints when the spot rate was $0.50 per forint. Delivery and payment were scheduled for December 20. On...

Q: Based on past experience, Leickner Company expects to purchase raw materials

Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 marks on March 15, 2018. To hedge this forecasted transaction, the company a...

Q: Vino Veritas Company, a U.S.-based importer of

Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,000 cases of wine at a price of 200 euros per case. The total purchase price is 200,000 e...

Q: Board Company has a foreign subsidiary that began operations at the start

Board Company has a foreign subsidiary that began operations at the start of 2017 with assets of 132,000 kites (the local currency unit) and liabilities of 54,000 kites. During this initial year of op...

Q: Citigroup Inc. (Citi) is a leading global financial services

Citigroup Inc. (Citi) is a leading global financial services company with over 200 million customer accounts and operations in more than 140 countries. Its operating units Citicorp and Citi Holdings p...

Q: Vulcan Materials Company, a member of the S&P 500

Vulcan Materials Company, a member of the S&P 500 Index, is the nation’s largest producer of construction aggregates, a major producer of asphalt mix and concrete, and a leading...

Q: Part A. Floral Delivery, Inc. (FD) acquired

Part A. Floral Delivery, Inc. (FD) acquired a fleet of vans on January 1, 2017, by issuing a $500,000, four-year, 4% fixed rate note, with interest payable annually on December 3. FD has the option to...

Q: Lynn Construction enters into a firm purchase commitment for equipment to be

Lynn Construction enters into a firm purchase commitment for equipment to be delivered on June 30, 2017, for a price of 10,000 GBP. It simultaneously signs a forward foreign exchange contract for 10,0...

Q: Kentucky Gold (KG) holds 10,000 gallons of whiskey

Kentucky Gold (KG) holds 10,000 gallons of whiskey in inventory on October 31, 2017, that costs $225 per gallon. KG contemplates selling the whiskey on March 31, 2018, when it completes the aging proc...

Q: Merrill Corporation engages in a valid cash flow hedge where it minimizes

Merrill Corporation engages in a valid cash flow hedge where it minimizes the risk from variable interest rated debt by promising to issue dividend payments from both its own portfolio and its portfol...

Q: A major cattle feeding operation has entered into a firm commitment to

A major cattle feeding operation has entered into a firm commitment to buy 100,000 bushels of corn to be delivered to its feed lot in Kansas. The corn is expected to be delivered in 90 days. The compa...

Q: On March 17, Kennedy Baking, Inc., committed to buy

On March 17, Kennedy Baking, Inc., committed to buy 1,000 tons of commodity A for delivery in May at a cost of $118 per ton. Concerned that the price of commodity A might decrease, on March 29 the com...

Q: Custom Brand Bakeries, Inc. (CBBI), located in Erie

Custom Brand Bakeries, Inc. (CBBI), located in Erie, Pennsylvania, bakes a variety of products for various parties on a contract basis. For example, a food company may contract with CBBI to make energ...

Q: Clayton Industries sells medical equipment worldwide. On March 1 of the

Clayton Industries sells medical equipment worldwide. On March 1 of the current year, the company sold equipment, with a cost of $160,000, to a foreign customer for 200,000 euros payable in 60 days. A...

Q: Williams Corporation imports, from a number of German manufacturers, large

Williams Corporation imports, from a number of German manufacturers, large machining equipment used in the tooling industry. On June 1, the company received delivery of a piece of machinery with a cos...

Q: Industrial Plating Corporation coats manufactured parts with a variety of coatings such

Industrial Plating Corporation coats manufactured parts with a variety of coatings such as Teflon, gold, and silver. The company intends to purchase 100,000 troy ounces of silver in September. The pur...

Q: During the third quarter of the current year, Beamer Manufacturing Company

During the third quarter of the current year, Beamer Manufacturing Company invested in derivative instruments for a variety of reasons. The various investments and hedging relationships are as follows...

Q: Hauser Corporation has $20,000,000 of outstanding debt

Hauser Corporation has $20,000,000 of outstanding debt that bears interest at a variable rate and matures on June 30, 2018. At inception of the debt, the company had a lower credit rating, and most av...

Q: Jarvis Corporation transacts business with a number of foreign vendors and customers

Jarvis Corporation transacts business with a number of foreign vendors and customers. These transactions are denominated in FC, and the company uses a number of hedging strategies to reduce the exposu...

Q: Kaiser Exporters buys used medical equipment and sells it to various foreign

Kaiser Exporters buys used medical equipment and sells it to various foreign health care institutions. On June 15, the company committed to sell medical equipment to a foreign hospital for 800,000 FC....

Q: Medical Distributors, Inc., is a U.S. company

Medical Distributors, Inc., is a U.S. company that buys and sells used medical equipment throughout the United States and Canada. During the month of June, the company had the following transactions w...

Q: On March 1, a company committed to acquire 10,000

On March 1, a company committed to acquire 10,000 units of inventory to be delivered on May 31. The purchase price is to be paid in foreign currency (FC) in the amount of 200,000 FC. Assume that the c...

Q: In the process of preparing a budget for the second quarter of

In the process of preparing a budget for the second quarter of the current fiscal year, Anderson Welding, Inc., has forecasted foreign sales of 1,200,00 foreign currency (FC). The company is concerned...

Q: Stark, Inc., placed an order for inventory costing 500,

Stark, Inc., placed an order for inventory costing 500,000 FC with a foreign vendor on April 15 when the spot rate was 1 FC = $0.683. Stark received the goods on May 1 when the spot rate was 1 FC = $0...

Q: Jackson, a U.S. company, acquires a variety

Jackson, a U.S. company, acquires a variety of raw materials from foreign vendors with amounts payable in foreign currency (FC). The company needs to acquire 20,000 units of raw materials, and the goo...

Q: In the past, Baxter Manufacturing has engaged in a number of

In the past, Baxter Manufacturing has engaged in a number of foreign currency transactions but has never before attempted to hedge these transactions. Baxter has given you three past events and asked...

Q: Brico Enterprises, a U.S. corporation, acquired an

Brico Enterprises, a U.S. corporation, acquired an 80% interest in Bandar Distributors in June 2012 when 1 FC equaled $1.62. Bandar is a foreign corporation whose functional currency is the FC. The co...

Q: What is the exposure to risk associated with a firm commitment to

What is the exposure to risk associated with a firm commitment to sell inventory that a fair value hedge is intended to reduce?

Q: A regional bakery is forecasting a major purchase of flour and is

A regional bakery is forecasting a major purchase of flour and is considering the use of a cash flow hedge. Explain how a cash flow hedge affects operating income currently and in the future as well a...

Q: A U.S. company purchases inventory from a foreign vendor

A U.S. company purchases inventory from a foreign vendor, and purchases are denominated in the foreign currency (FC). The U.S. dollar is expected to weaken against the FC. Explain how a forward contra...

Q: Assume that a U.S. company has a foreign subsidiary

Assume that a U.S. company has a foreign subsidiary whose functional currency is the U.S. dollar. Explain how exchange rates between the foreign currency and the dollar would have to change in order t...

Q: Casper Enterprises is forecasting two significant transactions and is concerned that adverse

Casper Enterprises is forecasting two significant transactions and is concerned that adverse price movements could negatively impact these transactions. In order to hedge against adverse movements, Ca...

Q: A Midwest food processor forecasts purchasing 300,000 pounds of soybean

A Midwest food processor forecasts purchasing 300,000 pounds of soybean oil in May. On February 20, the company acquires an option to buy 300,000 pounds of soybean oil in May at a strike price of $1.6...

Q: Millikin Corporation decided to hedge two transactions. The first transaction is

Millikin Corporation decided to hedge two transactions. The first transaction is a forecasted transaction to buy 500 tons of inventory in 60 days. The company was concerned that selling prices might i...

Q: A large corporate farming operation is holding an inventory of corn and

A large corporate farming operation is holding an inventory of corn and wheat and is concerned that excess harvests this season will lower the value of the commodities. In order to hedge against adver...

Q: Wellington Manufacturing manufactures industrial ovens used primarily in the process of coating

Wellington Manufacturing manufactures industrial ovens used primarily in the process of coating or painting metals. The ovens are sold throughout the world, and units are manufactured to customers&aci...

Q: The chief financial officer (CFO) of Baxter International has employed

The chief financial officer (CFO) of Baxter International has employed the use of hedges in a variety of contexts over the first quarter of the current calendar year as follows: Futures Contract&md...

Q: In several instances, Neibler Corporation has been engaged in transactions that

In several instances, Neibler Corporation has been engaged in transactions that were denominated or settled in foreign currencies (FC). Given recent volatility in exchange rates between the U.S. dol...

Q: Precept Capital Management is a hedge fund located in Dallas, Texas

Precept Capital Management is a hedge fund located in Dallas, Texas. The fund employs several investment strategies, one of which is based on comparing the trajectory of stock prices to the trajecto...

Q: You invested $1,250,000 with a market-

You invested $1,250,000 with a market-neutral hedge fund manager. The fee structure is 2/20, and the fund has a high-water-mark provision. Suppose the first year the fund manager loses 10 percent and...

Q: You have been assigned to implement a three-month hedge for

You have been assigned to implement a three-month hedge for a stock mutual fund portfolio that primarily invests in medium-sized companies. The mutual fund has a beta of 1.15 measured relative to the...

Q: If Ms. Harlan is truly concerned about benchmarks, she should

If Ms. Harlan is truly concerned about benchmarks, she should avoid which of her suggested investments? a. None of them b. Kelly Tool and Die c. Hedge funds

Q: Which of Ms. Harlan’s responses is most likely to make Mr

Which of Ms. Harlan’s responses is most likely to make Mr. Phillips consider her a bad candidate for investing in hedge funds? a. I pay a lot of attention to expense and return data from my investment...

Q: Kellogg’s uses large quantities of corn in its breakfast cereal operations.

Kellogg’s uses large quantities of corn in its breakfast cereal operations. Suppose the near-term weather forecast for the corn-producing states is drought like conditions, so corn prices are expected...

Q: A mutual fund that predominantly holds long-term Treasury bonds plans

A mutual fund that predominantly holds long-term Treasury bonds plans on liquidating the portfolio in three months. However, the fund manager is concerned that interest rates may rise from current lev...

Q: The town of South Park is planning a bond issue in six

The town of South Park is planning a bond issue in six months and Kenny, the town treasurer, is worried that interest rates may rise, thereby reducing the value of the bond issue. Should Kenny buy or...

Q: How does a high-water mark constrain hedge fund managers from

How does a high-water mark constrain hedge fund managers from earning excess performance management fees?

Q: Suppose you want to hedge a $500 million bond portfolio with

Suppose you want to hedge a $500 million bond portfolio with a duration of 5.1 years using 10-year Treasury note futures with a duration of 6.7 years, a futures price of 102, and 3 months to expirat...

Q: Suppose you want to hedge a $400 million bond portfolio with

Suppose you want to hedge a $400 million bond portfolio with a duration of 8.4 years using 10-year Treasury note futures with a duration of 6.2 years, a futures price of 102, and 85 days to expiration...

Q: To hedge the foreign exchange risk relative to the Canadian dollar,

To hedge the foreign exchange risk relative to the Canadian dollar, Jackson should: a. Buy a futures contract to exchange $7,083,333 for C$8.5 million. b. Buy a futures contract to exchange $6,390,977...

Q: In the New York exchange market, the forward rate for the

In the New York exchange market, the forward rate for the Indian currency, the rupee, is not quoted. If you were exposed to exchange rate risk in rupees, how could you hedge your position?

Q: Suppose you have a stock market portfolio with a beta of 1

Suppose you have a stock market portfolio with a beta of 1.15 that is currently worth $300 million. You wish to hedge against a decline using index options. Describe how you might do so with puts and...

Q: Suppose you hold LLL employee stock options representing options to buy 10

Suppose you hold LLL employee stock options representing options to buy 10,000 shares of LLL stock. You wish to hedge your position by buying put options with three-month expirations and a $22.50 stri...

Q: Immediately after establishing your put options hedge, volatility for LLL stock

Immediately after establishing your put options hedge, volatility for LLL stock suddenly jumps to 45 percent. This changes the number of put options required to hedge your employee stock options. How...

Q: You are managing a pension fund with a value of $300

You are managing a pension fund with a value of $300 million and a beta of 1.07. You are concerned about a market decline and wish to hedge the portfolio. You have decided to use SPX calls. How many c...

Q: Newton Grains plans to sell 100,000 bushels of corn from

Newton Grains plans to sell 100,000 bushels of corn from its current inventory in March 2018. The company paid $1 million for the corn during the fall 2017 harvest season. On October 1, 2017, Newton w...

Q: Basie Business Forms borrowed $5 million on July 1, 2017

Basie Business Forms borrowed $5 million on July 1, 2017, from First Kansas City Bank. The loan required annual interest payments at the LIBOR rate, reset annually each June 30. The loan principal is...

Q: On January 1, 2017, Four Brothers Manufacturing borrowed $10

On January 1, 2017, Four Brothers Manufacturing borrowed $10 million from Guiffrie Bank by signing a three-year, 8.0% fixed-rate note. The note calls for interest to be paid annually on December 31. T...

Q: Recall the Rombaurer Metals example in the chapter: On October 1

Recall the Rombaurer Metals example in the chapter: On October 1, 2017, Rombaurer has 10 million pounds of copper inventory on hand at an average cost of $0.65 a pound. The spot price for copper is $0...

Q: The following excerpts are from the financial statement note on Derivative Instruments

The following excerpts are from the financial statement note on Derivative Instruments and Hedging Activities in Molson Coors Brewing Company’s 2009 annual report: Simultaneous with the September 22,...

Q: Silverado Inc. buys titanium from a supplier that requires a six

Silverado Inc. buys titanium from a supplier that requires a six-month firm commitment on all purchases. On January 1, 2017, Silverado signs a contract with the supplier to purchase 10,000 pounds of t...

Q: Describes Chalk Hill’s use of an interest rate swap to hedge its

Describes Chalk Hill’s use of an interest rate swap to hedge its cash flow exposure to interest rate risk from variable rate debt. The journal entries in the exhibit illustrate how special “hedge acco...

Q: The cereal division of Kellogg Company intends to test market next year

The cereal division of Kellogg Company intends to test market next year an organic corn based cereal to be called NutriFlakesTR. The business plan calls for production to begin in late May 2015, with...

Q: Southwest Airlines Co. is a major airline that operates in the

Southwest Airlines Co. is a major airline that operates in the United States. Refer to the following information from Southwest Airlines’ 2015 3rd quarter 10-Q. 3. FINANCIAL DER...

Q: Required: 1. Which of the following qualifies as a

Required: 1. Which of the following qualifies as a hedged item? a. A company’s work-in-process inventory of unfinished washers, dryers, and refrigerators. b. Credit card receivables at JCPenney. c. Bu...

Q: Excerpts from the financial statements of Stanley Black & Decker, Inc

Excerpts from the financial statements of Stanley Black & Decker, Inc. follow. From Stanley Black & Decker’s Accounts receivable note: Required: 1. Determine the diff...

Q: Refer to the salesforce.com financial statement excerpts given below to

Refer to the salesforce.com financial statement excerpts given below to answer the questions. On January 31, 2015, the price of salesforce.com stock was $56.45, and there were 650,596,000 shares of co...

Q: Consider an instrument that will pay off S dollars in 2 years

Consider an instrument that will pay off S dollars in 2 years, where S is the value of the Nikkei index. The index is currently 20,000. The yen/dollar exchange rate is 100 (yen per dollar). The correl...

Q: How can an energy producer use derivatives markets to hedge risks?

How can an energy producer use derivatives markets to hedge risks?

Q: Sample Application F in the DerivaGem Application Builder Software considers the static

Sample Application F in the DerivaGem Application Builder Software considers the static options replication example in Section 26.17. It shows the way a hedge can be constructed using four options (as...

Q: In the DerivaGem Application Builder Software modify Sample Application D to test

In the DerivaGem Application Builder Software modify Sample Application D to test the effectiveness of delta and gamma hedging for a call on call compound option on a 100,000 units of a foreign curren...

Q: Consider the following two financial institutions: /

Consider the following two financial institutions: Managers of the money center bank are concerned that interest rates may fall over the next four years, while managers of the savings bank are conce...

Q: Consider the following two financial institutions: /

Consider the following two financial institutions: Managers of the bank are concerned that interest rates may fall over the next four years, while managers of the savings association are concerned t...

Q: What motivates FI managers to hedge foreign currency exposures? What are

What motivates FI managers to hedge foreign currency exposures? What are the limitations to hedging foreign currency exposures?

Q: What are the two primary methods of hedging FX risk for an

What are the two primary methods of hedging FX risk for an FI? What conditions are necessary to achieve a perfect hedge through on-balance-sheet hedging? What are the advantages and disadvantages of o...

Q: North Bank has been borrowing in the U.S. markets

North Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $2 million CD at 6 percent and is planning...

Q: Jones Bank has been borrowing in the U.S. markets

Jones Bank has been borrowing in the U.S. markets and lending abroad, thereby incurring foreign exchange risk. In a recent transaction, it issued a one-year $5 million CD at 4 percent and is planning...

Q: What is a put option, and how might it be used

What is a put option, and how might it be used to hedge a forecasted transaction?

Q: Currency exchange rate fluctuations may impact Mattel’s results of operations and cash

Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel’s currency transaction exposures include gains and losses realized on unhedged inventory purchases...

Q: What criteria must be satisfied for a foreign currency transaction to be

What criteria must be satisfied for a foreign currency transaction to be considered a hedge of an identifiable foreign currency commitment?

Q: Apple Company was incorporated in Delaware in 2012. On November 2

Apple Company was incorporated in Delaware in 2012. On November 2, 2014, the controller of the company entered into a forward contract to sell 50,000 British pounds for $1.5920 on March 1, 2015. The f...

Q: Citron Company is a U.S.-based citrus grower.

Citron Company is a U.S.-based citrus grower. On October 1, 2014, the company entered into a contract to ship 25,000 boxes of grapefruit on January 28 to Japan. Payment of 50,100,000 yen is to be rece...

Q: ASI recently completed the development and installation of an accounting information system

ASI recently completed the development and installation of an accounting information system for a company located in Rio De Janeiro, Brazil. The company considered that all revenue realization criteri...

Q: 1. On June 1, 2014, a U.S

1. On June 1, 2014, a U.S. firm contracts to sell equipment (with an asking price of 2,000,000 krona) in Sweden. The firm will take delivery and will pay for the equipment on August 1, 2014. 2. Spot r...

Q: On October 1, 2014, Fairchange Corporation ordered some equipment from

On October 1, 2014, Fairchange Corporation ordered some equipment from a supplier for 300,000 euros. Delivery and payment are to occur on November 15, 2014. The spot rates on October 1 and November 15...

Q: On October 1, 2014, Fairchange Corporation ordered some equipment from

On October 1, 2014, Fairchange Corporation ordered some equipment from a supplier for 300,000 euros. Delivery is to occur on November 15, 2014, while payment is expected to occur on December 15, 2014....

Q: On October 1, 2014, Fairchange Corporation ordered some equipment from

On October 1, 2014, Fairchange Corporation ordered some equipment from a supplier for 300,000 euros. Delivery and payment are to occur on November 15, 2014. The spot rates on October 1 and November 15...

Q: On December 1, 2014, Tuscano Corp. entered into a

On December 1, 2014, Tuscano Corp. entered into a transaction to import raw materials from a foreign company. The account is to be settled on February 1 with the payment of 60,000 foreign currency uni...

Q: Select the best answer for each of the following. 1

Select the best answer for each of the following. 1. A forward contract is a hedge of an identifiable foreign currency commitment if (a) The forward contract is designated as, and is effective as, a h...

Q: A little more than 10 months ago, Luke Weaver, a

A little more than 10 months ago, Luke Weaver, a mortgage banker in Phoenix, bought 300 shares of stock at $40 per share. Since then, the price of the stock has risen to $75 per share. It is now near...

Q: Jim Pernelli and his wife, Polly, live in Augusta,

Jim Pernelli and his wife, Polly, live in Augusta, Georgia. Like many young couples, the Pernellis are a two-income family. Jim and Polly are both college graduates and hold high-paying jobs. Jim has...

Q: Assume you hold a well-balanced portfolio of common stocks.

Assume you hold a well-balanced portfolio of common stocks. Under what conditions might you want to use a stock-index (or ETF) option to hedge the portfolio? a. Briefly explain how such options could...

Q: Myles Houck holds 600 shares of Lubbock Gas and Light. He

Myles Houck holds 600 shares of Lubbock Gas and Light. He bought the stock several years ago at $48.50, and the shares are now trading at $75. Myles is concerned that the market is beginning to soften...

Q: Nick Fitzgerald holds a well-diversified portfolio of high-quality

Nick Fitzgerald holds a well-diversified portfolio of high-quality, large-cap stocks. The current value of Fitzgerald’s portfolio is $735,000, but he is concerned that the market is heading for a big...

Q: Not long ago, Vanessa Woods sold her company for several million

Not long ago, Vanessa Woods sold her company for several million dollars. She took some of that money and put it into the stock market. Today Vanessa’s portfolio of bluechip stocks is worth $3.8 milli...

Q: A wealthy investor holds $500,000 worth of U.

A wealthy investor holds $500,000 worth of U.S. Treasury bonds. These bonds are currently being quoted at 105% of par. The investor is concerned, however, that rates are headed up over the next six mo...

Q: Why would an investor want to use index options to hedge a

Why would an investor want to use index options to hedge a portfolio of common stock? Could the same objective be obtained using options on ETFs? If the investor thinks the market is in for a fall, wh...

Q: Define each of the following: a. Open-end

Define each of the following: a. Open-end investment companies b. Closed-end investment companies c. Exchange-traded funds d. Real estate investment trusts e. Hedge funds

Q: Briefly define and differentiate among the following investments. Which offer fixed

Briefly define and differentiate among the following investments. Which offer fixed returns? Which are derivative securities? Which offer professional investment management? a. Bonds b. Convertible se...

Q: Following is a sample of eight Level-1 CFA exam questions

Following is a sample of eight Level-1 CFA exam questions that deal with many of the topics covered in Chapters 11, 12 and 13 of this text, including the structure of mutual funds, portfolio diversifi...

Q: Rick owns stock in a retailer that he believes is highly undervalued

Rick owns stock in a retailer that he believes is highly undervalued. Rick expects that the stock will increase in value nicely over the long term. He is concerned, however, that the entire retail ind...

Q: A mutual fund plans to purchase $500,000 of 30

A mutual fund plans to purchase $500,000 of 30-year Treasury bonds in four months. These bonds have a duration of 12 years and are priced at 96-08 (32nds). The mutual fund is concerned about interest...

Q: Village Bank has $240 million worth of assets with a duration

Village Bank has $240 million worth of assets with a duration of 14 years and liabilities worth $210 million with a duration of four years. In the interest of hedging interest rate risk, Village Bank...

Q: An FI has a $100 million portfolio of six-year

An FI has a $100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at par and have a duration of five years. The FI wishes to hedge the portfolio with...

Q: Corporate Bank has $840 million of assets with a duration of

Corporate Bank has $840 million of assets with a duration of 12 years and liabilities worth $720 million with a duration of seven years. Assets and liabilities are yielding 7.56 percent. The bank is c...

Q: An FI has a $200 million asset portfolio that has an

An FI has a $200 million asset portfolio that has an average duration of 6.5 years. The average duration of its $160  million in liabilities is 4.5 years. Assets and liabilities are yielding 10 percen...

Q: A mutual fund plans to purchase $10 million of 20-

A mutual fund plans to purchase $10 million of 20-year T-bonds in two months. The bonds are yielding 7.68 percent. These bonds have a duration of 11 years. The mutual fund is concerned about interest...

Q: How can caps, floors, and collars be used to hedge

How can caps, floors, and collars be used to hedge interest rate risk?

Q: What is a naive hedge? How does a naive hedge protect

What is a naive hedge? How does a naive hedge protect an FI from risk?

Q: Suppose that you purchase a Treasury bond futures contract at $95

Suppose that you purchase a Treasury bond futures contract at $95 per $100 of face value. a. What is your obligation when you purchase this futures contract? b. If an FI purchases this contract, in wh...

Q: Answer the following: a. What are the two ways

Answer the following: a. What are the two ways to use call and put options on T-bonds to generate positive cash flows when interest rates decline? b. When and how can an FI use options on T-bonds to h...

Q: What is a hedge fund and how is it different from a

What is a hedge fund and how is it different from a mutual fund?

Q: What are the different categories of hedge funds?

What are the different categories of hedge funds?

Q: What types of fees do hedge funds charge?

What types of fees do hedge funds charge?

Q: What is the difference between domestic hedge funds and offshore hedge funds

What is the difference between domestic hedge funds and offshore hedge funds? Describe the advantages of offshore hedge funds over domestic hedge funds.

Q: Suppose that a pension fund manager anticipates the purchase of a 20

Suppose that a pension fund manager anticipates the purchase of a 20-year, 8 percent coupon T-bond at the end of two years. Interest rates are assumed to change only once every year at year end. At th...

Q: In each of the following cases, indicate whether it would be

In each of the following cases, indicate whether it would be appropriate for an FI to buy or sell a forward contract to hedge the appropriate risk. a. A commercial bank plans to issue CDs in three mon...

Q: An FI holds a 15-year, $10,000

An FI holds a 15-year, $10,000,000 par value bond that is priced at 104 and yields 7 percent. The FI plans to sell the bond but for tax purposes must wait two months. The bond has a duration of 9.4 ye...

Q: Hedge Row Bank has the following balance sheet (in millions):

Hedge Row Bank has the following balance sheet (in millions): The duration of the assets is six years and the duration of the liabilities is four years. The bank is expecting interest rates to fall...

Q: Tree Row Bank has assets of $150 million, liabilities of

Tree Row Bank has assets of $150 million, liabilities of $135 million, and equity of $15 million. The asset duration is six years and the duration of the liabilities is four years. Market interest rat...

Q: The financial statements of PepsiCo and the Notes to Consolidated Financial statements

The financial statements of PepsiCo and the Notes to Consolidated Financial statements appear in Appendix A. Financial statements of PepsiCo: Notes to Consolidated Financial statements: Instructi...

Q: Discuss whether hedge funds are good or bad for the liquidity of

Discuss whether hedge funds are good or bad for the liquidity of markets.

Q: A fund of funds divides its money between five hedge funds that

A fund of funds divides its money between five hedge funds that earn –5%, 1%, 10%, 15%, and 20% before fees in a particular year. The fund of funds charges 1 plus 10% and the hedge funds charge 2 plus...

Q: A hedge fund charges 2 plus 20%. A pension fund invests

A hedge fund charges 2 plus 20%. A pension fund invests in the hedge fund. Plot the return to the pension fund as a function of the return to the hedge fund.

Q: Indicate the accounting principle or method described in each of the following

Indicate the accounting principle or method described in each of the following statements. a. This inventory cost-flow assumption results in reporting the largest net income during periods of rising a...

Q: For each of the items a to d below, describe the

For each of the items a to d below, describe the accounting treatment using one of the following four approaches, assuming that the firm does not elect the fair value option: (1) Measured at fair valu...

Q: Refer to Examples 15 and 19 in the chapter. Delmar holds

Refer to Examples 15 and 19 in the chapter. Delmar holds 10,000 gallons of whiskey in inventory on October 31, 2013, that costs $225 per gallon. Delmar contemplates selling the whiskey on March 31, 20...

Q: On July 1, 2013, Owens Corporation places an order with

On July 1, 2013, Owens Corporation places an order with a European supplier for manufacturing equipment for delivery on June 30, 2014. The purchase is denominated in euros in the amount of â ...

Q: Distinguish between a fair value hedge and a cash flow hedge.

Distinguish between a fair value hedge and a cash flow hedge.

Q: Recognizing a derivative classified as a fair value hedge of a firm

Recognizing a derivative classified as a fair value hedge of a firm commitment as an asset but not recognizing the commitment that the derivative is hedging as a liability is inconsistent.” Do you agr...

Q: Patterson Appliance uses a three-column purchases journal. The company is

Patterson Appliance uses a three-column purchases journal. The company is located in Fresno, California. In addition to a general ledger, Patterson Appliance also uses an accounts payable ledger. Tran...

Q: Hart Golf Co. uses titanium in the production of its specialty

Hart Golf Co. uses titanium in the production of its specialty drivers. Hart anticipates that it will need to purchase 200 ounces of titanium in November 2017, for clubs that will be sold in advance o...

Q: LEW Jewelry Co. uses gold in the manufacture of its products

LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2017, for jewelry that will be shipped for the holiday shoppin...

Q: On October 15, 2017, Oil Products Co. purchased 4

On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of $240,000 ($60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating se...

Q: Maple Company had the following export and import transactions during 20X5:

Maple Company had the following export and import transactions during 20X5: 1. On March 1, Maple sold goods to a Canadian company for C$30,000, receivable on May 30. The spot rates for Canadian dollar...

Q: On December 1, 20X1, Micro World Inc. entered into

On December 1, 20X1, Micro World Inc. entered into a 120-day forward contract to sell 100,000 Australian dollars (A$). Micro World’s fiscal year ends on December 31. The direct excha...

Q: Select the correct answer for each of the following questions.

Select the correct answer for each of the following questions. 1. According to ASC 815, which of the following is not an underlying? a. A security price. b. A monthly average temperature. c. The pric...

Q: Mega Company believes the price of oil will increase in the coming

Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oil as a price risk-hedging device to hedge the expected increase in prices...

Q: On November 3, 20X2, PRD Corporation acquired 2 JRS Company

On November 3, 20X2, PRD Corporation acquired 2 JRS Company bonds ($1,000 face value) at a cost of 105. PRD classifies them as available-for-sale securities. On this same date, PRD decides to hedge ag...

Q: Match the items in the left-hand column with the descriptions

Match the items in the left-hand column with the descriptions/explanations in the right-hand column.

Q: A forward exchange contract may be used (a) to

A forward exchange contract may be used (a) to manage an exposed foreign currency position, (b) to hedge an identifiable foreign currency commitment, (c) to hedge a forecasted foreign currency transac...

Q: A indicates that the item relates to Appendix 11A. On

A indicates that the item relates to Appendix 11A. On November 1, 20X6, Smith Imports Inc. contracted to purchase teacups from England for £30,000. The teacups were to be delivered on Jan...

Q: Select the correct answer for each of the following questions.

Select the correct answer for each of the following questions. 1. The following information applies to Denton Inc.’s sale of 10,000 foreign currency units under a forward contract da...

Q: The following information should be used for questions 1, 2,

The following information should be used for questions 1, 2, and 3. Select the best answers under each of two alternative assumptions: (a) the LCU is the functional currency and the translation method...

Q: What does it mean to hedge a financial transaction?

What does it mean to hedge a financial transaction?

Q: Bernard Bilski and Rand Warsaw filed a patent application with the U

Bernard Bilski and Rand Warsaw filed a patent application with the U.S. Patent and Trademark Office (PTO). The application sought patent protection for a claimed invention that explains how buyers and...

Q: Sleek Corporation is a public corporation whose stock is traded on a

Sleek Corporation is a public corporation whose stock is traded on a national securities exchange. Sleek hired Garson Associates, CPAs, to audit Sleek’s financial statements. Sleek needed the audit to...

Q: During the current year, the management of Hanover, Inc.,

During the current year, the management of Hanover, Inc., entered into a futures contract to hedge the price of silver that will be needed for next year’s production. The contract, which is held by Ha...

Q: For each of the independent situations described below select the appropriate inherent

For each of the independent situations described below select the appropriate inherent risk factor described and the effect of the inherent risk factor on the company’s net income us...

Q: A company borrows on a floating-rate loan, but wishes

A company borrows on a floating-rate loan, but wishes to hedge against interest variations so swaps the interest for fixed rate. The swap should be perfectly effective and has zero fair value at incep...

Q: At the start of the year Cornish plc entered into a number

At the start of the year Cornish plc entered into a number of financial instruments and is considering how to classify these instruments under IFRS 9. The instruments are as follows (a) Investment in...

Q: One way to hedge a foreign-currency transaction loss is to

One way to hedge a foreign-currency transaction loss is to a. pay debts as late as possible. b. pay in the foreign currency. c. offset foreign-currency inventory and plant assets. d. collect in yo...

Q: Joi Chatman recently received her finance degree and has decided

Joi Chatman recently received her finance degree and has decided to enter the mortgage broker business. Rather than working for someone else, she will open her own shop. Her cousin Mike has approached...

Q: Joi Chatman recently received her finance degree and has decided

Joi Chatman recently received her finance degree and has decided to enter the mortgage broker business. Rather than working for someone else, she will open her own shop. Her cousin Mike has approached...

Q: The treasurer for Pittsburgh Iron Works wishes to use financial futures to

The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $138,000 per contract. It is July and the...

Q: You are the vice president of finance for Exploratory Resources, headquartered

You are the vice president of finance for Exploratory Resources, headquartered in Houston, Texas. In January 20X1, your firm’s Canadian subsidiary obtained a six-month loan of 150,000 Canadian dollars...

Q: Describe two techniques that a company can use to hedge against transaction

Describe two techniques that a company can use to hedge against transaction exchange risk.

Q: Options can protect a firm against the downside risk of a business

Options can protect a firm against the downside risk of a business transaction while preserving the upside potential from the transaction. In contrast, forward and futures contracts normally protect a...

Q: In February, Tech Components Inc. (TCI), a manufacturer

In February, Tech Components Inc. (TCI), a manufacturer of specialized electronic components, was negotiating a supply agreement with a major auto manufacturer to supply specialized electronic compone...

Q: Disher Cotton Farms is a large cotton producer located near Lubbock,

Disher Cotton Farms is a large cotton producer located near Lubbock, Texas. Each year Disher plants its fields in cotton and then waits until the fall before the cotton is picked and sold. Disher know...

Q: One of the most important operating expenses for the Olde Virginia Brick

One of the most important operating expenses for the Olde Virginia Brick Company is natural gas, which is used to bake and dry the bricks. Natural gas prices have recently been quite volatile, now app...

Q: What derivative securities can be used to hedge the effects of fluctuations

What derivative securities can be used to hedge the effects of fluctuations in currency values on the cash flows of firms and investors?

Q: CanComp has a contract to deliver a large computer system to a

CanComp has a contract to deliver a large computer system to a South African company in one year and would like to hedge the currency risk. CanComp will receive payment of R3.5 million (the currency o...

Q: CanComp, a Canadian computer manufacturer, will be delivering a large

CanComp, a Canadian computer manufacturer, will be delivering a large computer system to a German firm in six months. CanComp expects to receive payment of US$1.5 million at that time. Currently the s...

Q: CanGold Mining Company borrowed €100 million in France at an annual

CanGold Mining Company borrowed €100 million in France at an annual interest rate of 3.5 percent. The principal plus interest is due in one year. CanGold used the funds to purchase machine parts in Ge...

Q: 1. Which of the following statements is false? a

1. Which of the following statements is false? a. A spot price is a price today for immediate delivery. b. If a Canadian firm has to pay U.S. dollars in the future, it worries about the potential depr...

Q: 1. Which of the following statements concerning Government of Canada bond

1. Which of the following statements concerning Government of Canada bond futures is false? a. The contract price is quoted per $100. b. A maximum position limit is set to prevent a single dominant ho...

Q: Simon manages a large bond portfolio and wishes to hedge against interest

Simon manages a large bond portfolio and wishes to hedge against interest rate risk. His portfolio includes Government of Canada bonds and high‐grade Canadian corporate bonds. The correlation between...

Q: What are the four main contractual instruments used to hedge transaction exposure

What are the four main contractual instruments used to hedge transaction exposure?

Q: How does a money market hedge differ for an account receivable versus

How does a money market hedge differ for an account receivable versus that of an account payable? Is it really a meaningful difference?

Q: When is a balance sheet hedge justified?

When is a balance sheet hedge justified?

Q: Explain how back-to-back loans can hedge foreign exchange

Explain how back-to-back loans can hedge foreign exchange operating exposure. Would firms have any specific worries about their partner in a back-to-back loan arrangement?

Q: Explain how currency swaps can hedge foreign exchange operating exposure. What

Explain how currency swaps can hedge foreign exchange operating exposure. What are the accounting advantages of currency swaps?

Q: How do some firms attempt to hedge their long-term operation

How do some firms attempt to hedge their long-term operation exposure with contractual hedges? What assumptions do they make in order to justify contractual hedging of their operating exposure? How ef...

Q: Minelli Enterprises uses large amounts of copper in the manufacture of ceiling

Minelli Enterprises uses large amounts of copper in the manufacture of ceiling fans. The firm has been very concerned about the detrimental impact of rising copper prices on its earnings and has decid...

Q: What is a hedge fund, and how is it different from

What is a hedge fund, and how is it different from a mutual fund?

Q: What is a swap contract? How are swap contracts used to

What is a swap contract? How are swap contracts used to hedge interest rate risk?

Q: Chemical plants rely on crude oil as the base material for the

Chemical plants rely on crude oil as the base material for the manufacture of a whole host of products. How might such a firm hedge the risk of a price increase in the cost of crude oil spanning the n...

Q: Describe how forward contracts can be used to hedge the risk of

Describe how forward contracts can be used to hedge the risk of fluctuating commodity prices for firms that must purchase these commodities in the future.

Q: What are the limitations of the use of forward contracts to construct

What are the limitations of the use of forward contracts to construct a hedge against price risk? How does a futures exchange control for these limitations?

Q: QBV, a non‐dividend‐paying stock, is currently

QBV, a non‐dividend‐paying stock, is currently trading for $80 a share. There is a 25‐percent chance that the stock will trade for $65 in one year, and a 75‐percent chance that the price will increase...

Q: What is the strike price (X) if PU is $

What is the strike price (X) if PU is $50, PD is $42, and the hedge ratio ( h) is 2?

Q: 1. Which of the following statements about a call option is

1. Which of the following statements about a call option is false? a. A call option is the right, not the obligation, to buy the underlying asset. b. A call option is in the money if the asset price i...

Q: What is a hedge ratio?

What is a hedge ratio?

Q: How can the firm use currency options to hedge foreign-currency

How can the firm use currency options to hedge foreign-currency exposures resulting from international transactions?

Q: A hedge fund charged with managing part of Harvard University’s endowment purchased

A hedge fund charged with managing part of Harvard University’s endowment purchased more than 1 million put options on Enron stock not long before the company went bankrupt, making tens of millions of...

Q: A hedge fund has created a portfolio using just two stocks.

A hedge fund has created a portfolio using just two stocks. It has shorted $35,000,000 worth of Oracle stock and has purchased $85,000,000 of Intel stock. The correlation between Oracleâ€&#...

Q: Consider the portfolio in Problem 27. Suppose the correlation between Intel

Consider the portfolio in Problem 27. Suppose the correlation between Intel and Oracle’s stock increases, but nothing else changes. Would the portfolio be more or less risky with thi...

Q: The Dodd-Frank Act requires that firms disclose whether employees and

The Dodd-Frank Act requires that firms disclose whether employees and directors are permitted to hedge against declines in the firm’s stock price. Why might this matter for corporate governance?

Q: Suppose Starbucks consumes 100 million pounds of coffee beans per year.

Suppose Starbucks consumes 100 million pounds of coffee beans per year. As the price of coffee rises, Starbucks expects to pass along 60% of the cost to its customers through higher prices per cup of...

Q: In 2006, twenty’s even entities became limited partners in two hedge

In 2006, twenty’s even entities became limited partners in two hedge funds that had invested with Bernard Madoff and his investment firm. The partners’ investment adviser gave them various investment...

Q: It was a hot, humid afternoon in April. Kirk could It was a hot, humid afternoon in April. Kirk could

It was a hot, humid afternoon in April. Kirk could feel the pressure mounting. The memo on his desk read, “Please see me immediately!” Kirk knew that, sooner or later, his boss, Brian Daltrey, was goi...

Q: How does the accounting for a fair value hedge differ from the

How does the accounting for a fair value hedge differ from the accounting for a cash flow hedge of an unrecognized firm commitment?

Q: What is the suggested financial statement presentation of hedge accounts recorded under

What is the suggested financial statement presentation of hedge accounts recorded under the gross method? Why?

Q: What is meant by hedge accounting?

What is meant by hedge accounting?

Q: Differentiate between the accounting for a fair value hedge and a cash

Differentiate between the accounting for a fair value hedge and a cash flow hedge.

Q: List some ways that a Canadian company could hedge against foreign currency

List some ways that a Canadian company could hedge against foreign currency exchange rate fluctuations.

Q: When will the premium paid on a forward contract to hedge a

When will the premium paid on a forward contract to hedge a firm commitment to purchase inventory be reported in income under a cash flow hedge? Explain.

Q: Would hedge accounting be used in a situation in which the hedged

Would hedge accounting be used in a situation in which the hedged item and the hedging instrument were both monetary items on a company's statement of financial position? Explain.

Q: Why might a company want to hedge its balance sheet exposure?

Why might a company want to hedge its balance sheet exposure? What is the paradox associated with hedging balance sheet exposure?

Q: How are gains and losses on financial instruments used to hedge the

How are gains and losses on financial instruments used to hedge the net investment in a foreign operation reported in the consolidated financial statements when the PCT method is used to translate the...

Q: Interfast Corporation, a fastener manufacturer, has recently been expanding its

Interfast Corporation, a fastener manufacturer, has recently been expanding its sales through exports to foreign markets. Earlier this year, the company negotiated the sale of several thousand cases o...

Q: ZIM Inc. (ZIM) is a high-technology company

ZIM Inc. (ZIM) is a high-technology company that develops, designs, and manufactures telecommunications equipment. ZIM was founded in Year 5 by Dr. Alex Zimmer, the former assistant head of research a...

Q: Manitoba Exporters Inc. (MEl) sells Inuit carvings to countries

Manitoba Exporters Inc. (MEl) sells Inuit carvings to countries throughout the world. On December 1, Year 5, MEl sold 10,000 carvings to a wholesaler in a foreign country at a total cost of 600,000 fo...

Q: On May 1, Year 1, JDH orders equipment from a

On May 1, Year 1, JDH orders equipment from a supplier in Germany for €100,000 with delivery scheduled for October 1, Year 1. Payment is due on December 31, Year 1. On May 2, Year 1 J...

Q: On June 1, Year 3, Forever Young Corp. (

On June 1, Year 3, Forever Young Corp. (FYC) ordered merchandise from a supplier in Turkey for Turkish lira (TL) 217,000. The goods were delivered on September 30, with terms requiring cash on deliver...

Q: As a result of its export sales to customers in Switzerland,

As a result of its export sales to customers in Switzerland, the Lenox Company has had Swiss-franc-denominated revenues over the past number of years. In order to gain protection from future exchange...

Q: Assume that all of the facts in Problem 1 remain unchanged except

Assume that all of the facts in Problem 1 remain unchanged except that MEl uses hedge accounting. Also, assume that the forward element and spot elements on the forward contract are accounted for sepa...

Q: Lamont Company is a Canadian company that produces electronic switches for the

Lamont Company is a Canadian company that produces electronic switches for the telecommunications industry. Lamont regularly imports component parts from Sousa Ltd., a supplier located in Mexico, and...

Q: On October 1, Year 6, Versatile Company contracted to sell

On October 1, Year 6, Versatile Company contracted to sell merchandise to a customer in Switzerland at a selling price of SF400,000. The contract called for the merchandise to be delivered to the cust...

Q: Hamilton Importing Corp. (HIC) imports goods from countries around

Hamilton Importing Corp. (HIC) imports goods from countries around the world for sale in Canada. On December 1, Year 3, HIC purchased 11,300 watches from a foreign wholesaler for DM613,000 when the sp...

Q: On August 1, Year 3, Carleton Ltd. ordered machinery

On August 1, Year 3, Carleton Ltd. ordered machinery from a supplier in Hong Kong for HK$500,000. The machinery was delivered on October 1, Year 3, with terms requiring payment in full by December 31,...

Q: EnDur Corp (EDC) is a Canadian company that exports computer

EnDur Corp (EDC) is a Canadian company that exports computer software. On February l, Year 2, EDC contracted to sell software to a customer in Denmark at a selling price of 600,000 Danish krona (DK) w...

Q: SPEC Co. is a Canadian investment company. It acquires real

SPEC Co. is a Canadian investment company. It acquires real estate properties in foreign countries for speculative purposes. On January 1, Year 5, SPEC incorporated a wholly owned subsidiary, CHIN Lim...

Q: Gold and precious metals have traditionally been considered a hedge against inflation

Gold and precious metals have traditionally been considered a hedge against inflation. If this is true, we would expect that a fund made up of precious metals (gold, silver, platinum, and others) woul...

Q: Because inflation reduces the purchasing power of the dollar, investors seek

Because inflation reduces the purchasing power of the dollar, investors seek investments that will provide higher returns when inflation is higher. It is frequently stated that common stocks provide j...

Q: CopMin Inc. is a private enterprise that is involved in copper

CopMin Inc. is a private enterprise that is involved in copper mining operations. The company currently owns two operating mines. It is January 1, 2017, and CopMin has recently entered into two types...

Q: Soron Limited is a private company that uses derivatives to mitigate a

Soron Limited is a private company that uses derivatives to mitigate a variety of risks. The ethical accountant, Leon Price, has just been hired as the new controller and has recently met with the CEO...

Q: Air Canada is Canada’s largest domestic and international airline, providing scheduled

Air Canada is Canada’s largest domestic and international airline, providing scheduled and charter air transportation for passengers and cargo. The airline industry has suffered many difficulties and...

Q: Cauchy Inc. (CI) has just had a planning meeting

Cauchy Inc. (CI) has just had a planning meeting with its auditors. There were several concerns that had been raised during the meeting regarding the draft financial statements for the December 31, 20...

Q: On January 2, 2017, Jackson Corporation purchased a call option

On January 2, 2017, Jackson Corporation purchased a call option for $500 on Walter’s common shares. The call option gives Jackson the option to buy 1,000 shares of Walter at a strike price of $30 per...

Q: The following situations occur independently. 1. A company knows

The following situations occur independently. 1. A company knows that it will require a large quantity of euros to pay for some imports in three months. The current exchange rate is satisfactory, and...

Q: On December 31, 2017, Master Corp. had a $

On December 31, 2017, Master Corp. had a $10-million, 8% fixed-rate note outstanding that was payable in two years. It decided to enter into a two-year swap with First Bank to convert the fixed-rate d...

Q: On January 2, 2017, Thompson Corp. issued a $

On January 2, 2017, Thompson Corp. issued a $100,000, four-year note at prime plus 1% variable interest, with interest payable semi-annually. On the same date, Thompson entered into an interest rate s...

Q: On January 2, 2017, Yellowknife Corp. issues a $

On January 2, 2017, Yellowknife Corp. issues a $10-million, five-year note at LIBOR, with interest paid annually. To protect against the cash flow uncertainty related to interest payments that are bas...

Q: Anchovy Corp. issued a $1-million, four-

Anchovy Corp. issued a $1-million, four-year, 7.5% fixed-rate interest only, non prepayable bond on December 31, 2016. Anchovy later decided to hedge the interest rate and change from a fixed rate to...

Q: LEW Jewellery Corp. uses gold in the manufacture of its products

LEW Jewellery Corp. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2017 for jewellery that will be shipped for the holiday sh...

Q: Access the annual report of Canadian Tire Corporation for its year ended

Access the annual report of Canadian Tire Corporation for its year ended January 2, 2016 from the company’s website or SEDAR (www.sedar. com). According to Note 1 to the financial statements, the comp...

Q: Several years ago, Prudential Securities was charged with fraud for late

Several years ago, Prudential Securities was charged with fraud for late trading. This was the first major brokerage house to be charged with the illegal practice of buying mutual funds after hours. T...

Q: In 2005, the SEC filed a civil action suit against Samuel

In 2005, the SEC filed a civil action suit against Samuel Israel III and Daniel E. Marino, managers of a group of hedge funds known as the Bayou Funds. The SEC alleged that Israel and Marino defrauded...

Q: Lisa runs a commercial bank and wants to hedge her interest rate

Lisa runs a commercial bank and wants to hedge her interest rate risk. Which off balance sheet transaction is Lisa going to engage in on behalf of the bank?

Q: Which of the following are characteristics that make hedge funds different from

Which of the following are characteristics that make hedge funds different from open-ended mutual funds?

Q: Access the annual report of Canadian Tire Corporation for its year ended

Access the annual report of Canadian Tire Corporation for its year ended December 31, 2017, from the company's website or SEDAR (www.sedar.com). According to Note 1 to the financial statements, the co...

Q: CopMin Inc. is a private enterprise that is involved in copper

CopMin Inc. is a private enterprise that is involved in copper mining operations. The company currently owns two operating mines. It is January 1, 2020, and CopMin has recently entered into two types...

Q: Air Canada is Canada's largest domestic and international airline, providing scheduled

Air Canada is Canada's largest domestic and international airline, providing scheduled and charter air transportation for passengers and cargo. The airline industry has suffered many difficulties and...

Q: Cauchy Inc. (CI) has just had a planning meeting

Cauchy Inc. (CI) has just had a planning meeting with its auditors. There were several concerns raised during the meeting regarding the draft financial statements for the December 31, 2020 year end. C...

Q: On January 2, 2020, Jackson Corporation purchased a call option

On January 2, 2020, Jackson Corporation purchased a call option for $500 on Walter's common shares. The call option gives Jackson the option to buy 1,000 shares of Walter at a strike price of $30 per...

Q: On January 2, 2020, Thompson Corp. issued a $

On January 2, 2020, Thompson Corp. issued a $100,000, four-year note at prime plus 1% variable interest, with interest payable semi-annually. On the same date, Thompson entered into an interest rate s...

Q: On January 2, 2020, Yellowknife Corp. issues a $

On January 2, 2020, Yellowknife Corp. issues a $10-million, five-year note at LIBOR, with interest paid annually. To protect against the cash flow uncertainty related to interest payments that are bas...

Q: Anchovy Corp. issued a $1-million, four-

Anchovy Corp. issued a $1-million, four-year, 7.5% fixed-rate interest only, non-prepayable bond on December 31, 2019. Anchovy later decided to hedge the interest rate and change from a fixed rate to...

Q: LEW Jewellery Corp. uses gold in the manufacture of its products

LEW Jewellery Corp. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2020 for jewellery that will be shipped for the holiday sh...

Q: On December 31, 2020, Master Corp. had a $

On December 31, 2020, Master Corp. had a $10-million, 8% fixed-rate note outstanding that was payable in two years. It decided to enter into a two-year swap with First Bank to convert the fixed-rate d...

Q: “Big Pharma” is the name the business press uses for

“Big Pharma” is the name the business press uses for the gigantic pharmaceutical industry. Most of us are familiar with Big Business and Big Government. Now Big Pharma continues to be in the news and...

Q: The global financial crisis (GFC) was brought about by a

The global financial crisis (GFC) was brought about by a bank induced liquidity squeeze in August 2007. Globally banks realised that their statement of financial positions contained highly toxic sub-p...

Q: 1. Point-of-sale scanning became feasible only when

1. Point-of-sale scanning became feasible only when industry agreed upon a universal system of bar coding. 2. One role of holding inventory is to hedge against anticipated increases in the cost of the...

Q: A very optimistic hedge fund investor expects his single-deposit investment

A very optimistic hedge fund investor expects his single-deposit investment to triple in value in 5 years. (a) What is the required effective monthly rate, compounded continuously? (b) What is the cor...

Q: In an effort to have enough money to finance his passion for

In an effort to have enough money to finance his passion for top-level off-road racing, a mechanical engineering graduate decided to sell some of his “toys." At time t = 0, he sold his chopper motorcy...

Q: Reread the Management Focus on Embraer, then answer the following questions

Reread the Management Focus on Embraer, then answer the following questions: a. What does the recent economic history of Brazil tell you about the relationship between price inflation and exchange rat...

Q: Some companies do not hedge their foreign exchange exposure. Do you

Some companies do not hedge their foreign exchange exposure. Do you think Apple is correct to hedge? Why?

Q: Why did Apple not fully hedge its foreign exchange exposure to avoid

Why did Apple not fully hedge its foreign exchange exposure to avoid a hit on earnings?

Q: Refer to Table 23.1 in the text to answer this

Refer to Table 23.1 in the text to answer this question. Suppose your firm produces breakfast cereal and needs 165,000 bushels of corn in December 2020 for an upcoming promotion. You would like to loc...

Q: If a U.S. company exports its goods to Japan

If a U.S. company exports its goods to Japan, how would it use a futures contract on Japanese yen to hedge its exchange rate risk? Would it buy or sell yen futures? In answering, assume that the excha...

Q: Is Subaru wise to expand its U.S. production capacity

Is Subaru wise to expand its U.S. production capacity? What other strategies could the company use to hedge against adverse changes in exchange rates? What are the pros and cons of the different hedgi...

Q: Cincinnati Tool Company (CTC) manufactures a line of electric garden

Cincinnati Tool Company (CTC) manufactures a line of electric garden tools that are sold in general hardware stores. The company’s controller, Will Fulton, has just received the sale...

Q: Greta has risk aversion of A = 3 when applied to return

Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (A...

Q: Greta has risk aversion of A = 3 when applied to return

Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (A...

Q: Greta has risk aversion of A = 3 when applied to return

Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (A...

Q: Greta has risk aversion of A = 3 when applied to return

Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (A...

Q: Greta has risk aversion of A = 3 when applied to return

Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (A...

Q: Greta has risk aversion of A = 3 when applied to return

Greta has risk aversion of A = 3 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of one-year strategies. (A...

Q: A manager is holding a $1 million stock portfolio with a

A manager is holding a $1 million stock portfolio with a beta of 1.25. She would like to hedge the risk of the portfolio using the S&P 500 stock index futures contract. How many dollars’ worth of the...

Q: Suppose that the relationship between the rate of return on Digital Computer

Suppose that the relationship between the rate of return on Digital Computer Corp. stock, the market index, and a computer industry index can be described by the following regression equation: rDigita...

Q: Which of the following hedge fund types is most likely to have

Which of the following hedge fund types is most likely to have a return that is closest to risk free? a. A market-neutral hedge fund. b. An event-driven hedge fund. c. A long/short hedge fund.

Q: A hedge fund with $1 billion of assets charges a management

A hedge fund with $1 billion of assets charges a management fee of 2% and an incentive fee of 20% of returns over a money market rate, which currently is 5%. Calculate total fees, both in dollars and...

Q: An investor in the common stock of companies in a foreign country

An investor in the common stock of companies in a foreign country may wish to hedge against the _____ of the investor’s home currency and can do so by _____ the foreign currency in the forward market....

Q: Ken Webster manages a $400 million equity portfolio benchmarked to the

Ken Webster manages a $400 million equity portfolio benchmarked to the S&P 500 index. Webster believes the market is overvalued when measured by several traditional fundamental/ economic indicator...

Q: Suppose your client says, “I am invested in Japanese stocks

Suppose your client says, “I am invested in Japanese stocks but want to eliminate my exposure to this market for a period of time. Can I accomplish this without the cost and inconvenience of selling o...

Q: You are holding call options on a stock. The stock’s beta

You are holding call options on a stock. The stock’s beta is .75, and you are concerned that the stock market is about to fall. The stock is currently selling for $5 and you hold 1 million options (i....

Q: Suppose that call options on ExxonMobil stock with time to expiration 3

Suppose that call options on ExxonMobil stock with time to expiration 3 months and strike price $90 are selling at an implied volatility of 30%. ExxonMobil stock price is $90 per share, and the risk-f...

Q: Using the data in Problem 46, suppose that 3-month

Using the data in Problem 46, suppose that 3-month put options with a strike price of $90 are selling at an implied volatility of 34%. Construct a delta-neutral portfolio comprising positions in calls...

Q: Suppose that JPMorgan Chase sells call options on $1.25

Suppose that JPMorgan Chase sells call options on $1.25 million worth of a stock portfolio with beta = 1.5. The option delta is .8. It wishes to hedge its resultant exposure to a market advance by buy...

Q: We will derive a two-state put option value in this

We will derive a two-state put option value in this problem. Data: S0 = 100; X = 110; 1 + r = 1.10. The two possibilities for ST are 130 and 80. a. Show that the range of S is 50, whereas that of P is...

Q: You are a corporate treasurer who will purchase $1 million of

You are a corporate treasurer who will purchase $1 million of bonds for the sinking fund in 3 months. You believe rates will soon fall, and you would like to repurchase the company’s sinking fund bond...

Q: Determine how a portfolio manager might use financial futures to hedge risk

Determine how a portfolio manager might use financial futures to hedge risk in each of the following circumstances: a. You own a large position in a relatively illiquid bond that you want to sell. b....

Q: A stock’s beta is a key input to hedging in the equity

A stock’s beta is a key input to hedging in the equity market. A bond’s duration is key in fixed income hedging. How are they used similarly? Are there any differences in the calculations necessary to...

Q: Yields on short-term bonds tend to be more volatile than

Yields on short-term bonds tend to be more volatile than yields on long-term bonds. Suppose that you have estimated that the yield on 20-year bonds changes by 10 basis points for every 15-basis-point...

Q: A corporation plans to issue $10 million of 10-year

A corporation plans to issue $10 million of 10-year bonds in three months. At current yields the bonds would have modified duration of 8 years. The T-note futures contract is selling at F0 = 100 and h...

Q: A U.S. exporting firm may use foreign exchange futures

A U.S. exporting firm may use foreign exchange futures to hedge its exposure to exchange rate risk. Its position in futures will depend in part on anticipated payments from its customers denominated i...

Q: Both gold-mining firms and oil-producing firms might choose

Both gold-mining firms and oil-producing firms might choose to use futures to hedge uncertainty in future revenues due to price fluctuations. But trading activity sharply tails off for maturities beyo...

Q: You manage a $23 million portfolio, currently all invested in

You manage a $23 million portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into T-...

Q: Would a market-neutral hedge fund be a good candidate for

Would a market-neutral hedge fund be a good candidate for an investor’s entire retirement portfolio? If not, would there be a role for the hedge fund in the overall portfolio of such an investor?

Q: A hedge fund with net asset value of $62 per share

A hedge fund with net asset value of $62 per share currently has a high water mark of $66. Is the value of its incentive fee more or less than it would be if the high water mark were $67?

Q: Reconsider the hedge fund in Problem 10. Suppose it is January

Reconsider the hedge fund in Problem 10. Suppose it is January 1, the standard deviation of the fund’s annual returns is 50%, and the risk-free rate is 4%. The fund has an incentive fee of 20%, but it...

Q: Suppose a hedge fund follows the following strategy. Each month it

Suppose a hedge fund follows the following strategy. Each month it holds $100 million of an S&P 500 index fund and writes out-of-the-money put options on $100 million of the index with exercise price...

Q: The following is part of the computer output from a regression of

The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 index. A hedge fund manager believes that Waterworks is underpriced, with...

Q: Here are data on three hedge funds. Each fund charges its

Here are data on three hedge funds. Each fund charges its investors an incentive fee of 20% of total returns. Suppose initially that a fund of funds (FF) manager buys equal amounts of each of these fu...

Q: How might the incentive fee of a hedge fund affect the manager’s

How might the incentive fee of a hedge fund affect the manager’s proclivity to take on high-risk assets in the portfolio?

Q: Why is it harder to assess the performance of a hedge fund

Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager?

Q: Which of the following is most accurate in describing the problems of

Which of the following is most accurate in describing the problems of survivorship bias and backfill bias in the performance evaluation of hedge funds? a. Survivorship bias and backfill bias both resu...

Q: Which of the following would be the most appropriate benchmark to use

Which of the following would be the most appropriate benchmark to use for hedge fund evaluation? a. A multifactor model. b. The S&P 500. c. The risk-free rate.

Q: With respect to hedge fund investing, the net return to an

With respect to hedge fund investing, the net return to an investor in a fund of funds would be lower than that earned from an individual hedge fund because of: a. Both the extra layer of fees and the...

Q: Michelle Industries issued a Swiss franc–denominated 5-year discount

Michelle Industries issued a Swiss franc–denominated 5-year discount note for SFr200 million. The proceeds were converted to U.S. dollars to purchase capital equipment in the United States. The compan...

Q: Mark Washington, CFA, is an analyst with BIC. One

Mark Washington, CFA, is an analyst with BIC. One year ago, BIC analysts predicted that the U.S. equity market would experience a slight downturn and suggested delta-hedging the BIC portfolio. U.S. eq...

Q: According to the Black-Scholes formula, what will be the

According to the Black-Scholes formula, what will be the hedge ratio (delta) of a call option as the stock price becomes infinitely large? Explain briefly.

Q: According to the Black-Scholes formula, what will be the

According to the Black-Scholes formula, what will be the hedge ratio (delta) of a put option for a very small exercise price?

Q: The hedge ratio of an at-the-money call option

The hedge ratio of an at-the-money call option on IBM is .4. The hedge ratio of an at-the-money put option is −.6. What is the hedge ratio of an at-the-money straddle position on IBM?

Q: All else equal, will a call option with a high exercise

All else equal, will a call option with a high exercise price have a higher or lower hedge ratio than one with a low exercise price?

Q: Reconsider the determination of the hedge ratio in the two-state

Reconsider the determination of the hedge ratio in the two-state model (see Section 21.2), where we showed that one-third share of stock would hedge one option. What would be the hedge ratio for the f...

Q: Show that Black-Scholes call option hedge ratios increase as the

Show that Black-Scholes call option hedge ratios increase as the stock price increases. Consider a 1-year option with exercise price $50, on a stock with annual standard deviation 20%. The T bill rate...

Q: Farmer Brown grows Number 1 red corn and would like to hedge

Farmer Brown grows Number 1 red corn and would like to hedge the value of the coming harvest. However, the futures contract is traded on the Number 2 yellow grade of corn. Suppose that yellow corn typ...

Q: A manager is holding a $1 million bond portfolio with a

A manager is holding a $1 million bond portfolio with a modified duration of 8 years. She would like to hedge the risk of the portfolio by short-selling Treasury bonds. The modified duration of T-bond...

Q: On January 1, 20X1, Hitchcock Corporation entered into a five

On January 1, 20X1, Hitchcock Corporation entered into a five-year interest rate swap agreement. The agreement uses a notional value of $500,000 and calls for the company to receivefixed interest of 9...

Q: In 20X0, the cereal division of Bloom Company (a fictional

In 20X0, the cereal division of Bloom Company (a fictional company) decided to test marketin 20X1 an organic corn-based cereal to be called Healthcrisp. The business plan calls for production to begin...

Q: Mattel, Inc., develops and manufacturers toys that it sells globally

Mattel, Inc., develops and manufacturers toys that it sells globally. Presented below are excerptsfrom its Form 10-K for the year ended December 31, 2018. NOTE 10—DERIVATIVE INSTRUME...

Q: Exhibit 19.1 describes Chalk Hill’s use of an interest rate

Exhibit 19.1 describes Chalk Hill’s use of an interest rate swap to hedge its cash flow exposureto interest rate risk from variable rate debt. The journal entries in the exhibit illustrate howspecial...

Q: Silverado Inc. buys titanium from a supplier that requires a six

Silverado Inc. buys titanium from a supplier that requires a six-month firm commitment on allpurchases. On January 1, 20X1, Silverado signs a contract with the supplier to purchase 10,000 pounds of ti...

Q: Newton Grains plans to sell 100,000 bushels of corn from

Newton Grains plans to sell 100,000 bushels of corn from its current inventory in March 20X2. The company paid $1 million for the corn during the fall 20X1 harvest season. On October 1, 20X1, Newton w...

Q: Basie Business Forms borrowed $5 million on July 1, 20X1

Basie Business Forms borrowed $5 million on July 1, 20X1, from First Kansas City Bank. Theloan required annual interest payments at the LIBOR rate, reset annually each June 30. Theloan principal is du...

Q: On January 1, 20X1, Four Brothers Manufacturing borrowed $10

On January 1, 20X1, Four Brothers Manufacturing borrowed $10 million from Guiffrie Bankby signing a three-year, 8.0% fixed-rate note. The note calls for interest to be paid annually on December 31. Th...

Q: Recall the Rombaurer Metals example in the chapter: On October 1

Recall the Rombaurer Metals example in the chapter: On October 1, 20X1, Rombaurer has 10 million pounds of copper inventory on hand at an average cost of $0.65 a pound. The spotprice for copper is $0....

Q: True or false? a. Exchange traded funds are hedge

True or false? a. Exchange traded funds are hedge funds that can be bought and sold on the stock exchange. b. Hedge funds provide small investors with low-cost diversification. c. The sale of insuranc...

Q: True or false? a. Banks are huge investors in

True or false? a. Banks are huge investors in corporate equity. b. Insurance companies are huge investors in corporate debt. c. Rather than investing directly in corporate equities, most households pr...

Q: On January 1, 2021, Labtech Circuits borrowed $100,

On January 1, 2021, Labtech Circuits borrowed $100,000 from First Bank by issuing a three-year, 8% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will...

Q: On January 1, 2021, Labtech Circuits borrowed $100,

On January 1, 2021, Labtech Circuits borrowed $100,000 from First Bank by issuing a three-year, 8% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will...

Q: A conceptual question in accounting for derivatives is this: Should gains

A conceptual question in accounting for derivatives is this: Should gains and losses on a hedge instrument be recorded as they occur, or should they be recorded to coincide (match) with income effects...

Q: LLB Industries borrowed $200,000 from Trust Bank by issuing

LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on January 1, 2021, and desi...

Q: On January 1, 2021, LLB Industries borrowed $200,

On January 1, 2021, LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on Janua...

Q: On January 1, 2021, LLB Industries borrowed $200,

On January 1, 2021, LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on Janua...

Q: On January 1, 2021, JPS Industries borrowed $300,

On January 1, 2021, JPS Industries borrowed $300,000 from Austin Bank by issuing a three-year, floating rate note based on LIBOR, with interest payable semi-annually on June 30 and December of each ye...

Q: Indicate (by abbreviation) the type of hedge each activity described

Indicate (by abbreviation) the type of hedge each activity described below would represent. Hedge Type: FV. Fair value hedge CF. Cash flow hedge FC. Foreign currency hedge N. Would not qualify as a he...

Q: On January 1, 2021, LLB Industries borrowed $200,

On January 1, 2021, LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on Janua...

Q: On January 1, 2021, S&S Corporation invested in

On January 1, 2021, S&S Corporation invested in LLB Industries’ negotiable two-year, 10% notes, with interest receivable quarterly. The company classified the investment as avail...

Q: When is a gain or a loss from a cash flow hedge

When is a gain or a loss from a cash flow hedge reported in earnings?

Q: Should gains and losses on a fair value hedge be recorded as

Should gains and losses on a fair value hedge be recorded as they occur, or should they be recorded to coincide with losses and gains on the item being hedged?

Q: Hines Moving Company held a fixed-rate debt of $2

Hines Moving Company held a fixed-rate debt of $2 million. The company wanted to hedge its fair value exposure with an interest rate swap. However, the only notional available at the time, on the type...

Q: You have been hired by a well-funded hedge fund to

You have been hired by a well-funded hedge fund to assess whether there are any arbitrage opportunities created by differences in prices in bitcoin across different markets. For the purposes of this e...

Q: Assuming that Brandt did not hedge its foreign exchange risk, how

Assuming that Brandt did not hedge its foreign exchange risk, how much foreign exchange gain or loss should it report on its 2020 income statement with regard to this transaction? a. $5,000 gain b. $3...

Q: Assuming that Brandt entered into a forward contract to sell 10 million

Assuming that Brandt entered into a forward contract to sell 10 million South Korean won on December 1, 2020, as a fair value hedge of a foreign currency receivable, what is the net impact on its net...

Q: On March 1, Derby Corporation (a U.S.-

On March 1, Derby Corporation (a U.S.-based company) expects to order merchandise from a sup- plier in Norway in three months. On March 1, when the spot rate is $0.10 per Norwegian krone, Derby enters...

Q: Shandra Corporation (a U.S.-based company) expects

Shandra Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 100,000 pounds, with delivery and payment to be made on April 20. On February 20, when the spot...

Q: What was the net impact on Stone Company’s 2020 income as a

What was the net impact on Stone Company’s 2020 income as a result of this fair value hedge of a firm commitment? a. $–0– b. $700 decrease in income c. $300 increase in income d. $700 increase in inco...

Q: What was the net impact on Stone Company’s 2021 income as a

What was the net impact on Stone Company’s 2021 income as a result of this fair value hedge of a firm commitment and export sale? a. $–0–. b. $1,300 decrease in income c. $78,000 increase in income d....

Q: What is the net impact on Munchkin’s net income for the quarter

What is the net impact on Munchkin’s net income for the quarter ended June 30, 2020, as a result of this forward contract hedge of a firm commitment? a. $–0– b. $2,400 increase in net income c. $4,000...

Q: What is the net impact on Munchkin’s net income for the quarter

What is the net impact on Munchkin’s net income for the quarter ended September 30, 2020, as a result of this forward contract hedge of a firm commitment and export sale? a. $–0– b. $115,000 increase...

Q: What is the net impact on Good Life Company’s 2020 net income

What is the net impact on Good Life Company’s 2020 net income as a result of this hedge of a forecasted foreign currency transaction? a. $–0– b. $400 decrease in net income c. $1,000 decrease in net i...

Q: What is the net impact on Good Life Company’s 2021 net income

What is the net impact on Good Life Company’s 2021 net income as a result of this hedge of a forecasted foreign currency transaction and import purchase? Assume that the raw materials are consumed and...

Q: Use the same facts as in Problem 31 except that Icebreaker Company

Use the same facts as in Problem 31 except that Icebreaker Company purchases materials from a foreign supplier on December 1, 2020, with payment of 16,000 dinars to be made on March 1, 2021. The mater...

Q: On September 1, Westbrook Corporation purchased goods from a foreign supplier

On September 1, Westbrook Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on December 1. On September 1, West- brook acquired a...

Q: On November 1, 2020, Cheng Company (a U.

On November 1, 2020, Cheng Company (a U.S.-based company) forecasts the purchase of goods from a foreign supplier for 100,000 yuan. Cheng expects to receive the goods on April 30, 2021, and make immed...

Q: On November 30, 2020, Walter Corporation (a U.

On November 30, 2020, Walter Corporation (a U.S.-based company) forecasts the sale of equipment to a foreign customer at a price of 500,000 crowns. The equipment is expected to be delivered on January...

Q: On October 1, 2020, Mertag Company (a U.

On October 1, 2020, Mertag Company (a U.S.-based company) receives an order from a customer in Poland to deliver goods on January 31, 2021, for a price of 1,000,000 Polish zlotys (PLN). Mertag enters...

Q: 37. On August 1, Pure Joy Corporation (a U

37. On August 1, Pure Joy Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 pounds. Pure Joy will receive and make payment for t...

Q: On June 1, Parker-Mae Corporation (a U.

On June 1, Parker-Mae Corporation (a U.S.-based company) received an order to sell goods to a foreign customer at a price of 100,000 francs. Parker-Mae will ship the goods and receive payment in three...

Q: Amaretta Company (a U.S.-based company) ordered

Amaretta Company (a U.S.-based company) ordered merchandise from a foreign supplier on November 20 at a price of 1,000,000 rupees when the spot rate was $0.050 per rupee. Delivery and payment were sch...

Q: Based on past experience, Maas Corp. (a U.

Based on past experience, Maas Corp. (a U.S.-based company) expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 francs on March 15, 2021. To hedge this forecasted transact...

Q: Pacifico Company, a U.S.-based importer of beer

Pacifico Company, a U.S.-based importer of beer and wine, purchased 1,000 cases of Oktoberfest- style beer from a German supplier for 50,000 euros. Relevant U.S. dollar exchange rates for the euro are...

Q: A U.S. exporter has a Thai baht account receivable

A U.S. exporter has a Thai baht account receivable resulting from an export sale on June 1 to a customer in Thailand. The exporter signed a forward contract on June 1 to sell Thai baht and designated...

Q: Monument Company (a U.S.-based company) ordered

Monument Company (a U.S.-based company) ordered a machine costing €100,000 from a foreign supplier on January 15, when the spot rate was $1.20 per €. A one-month forward contract was signed on that da...

Q: Christina Company (a U.S.-based company) has

Christina Company (a U.S.-based company) has a subsidiary in Canada that began operations at the start of 2020 with assets of 132,000 Canadian dollars (CAD) and liabilities of CAD 54,000. During this...

Q: On February 1, 2020, when the spot rate was $

On February 1, 2020, when the spot rate was $1.00 per Swiss franc, Blue Bogey Company (BBC) fore- casted the purchase of component parts on May 1, 2020, at a price of 100,000 Swiss francs. On that dat...

Q: The Cinco Centavo Company (CCC), a U.S.

The Cinco Centavo Company (CCC), a U.S. company, made credit sales to four customers in Asia on September 15, 2018, and received payment on October 15, 2018. Information related to these sales is as f...

Q: Under what conditions can a foreign currency derivative be considered “highly

Under what conditions can a foreign currency derivative be considered “highly effective” as a hedge without conducting a quantitative assessment?

Q: How does the accounting for a hedge of a foreign currency firm

How does the accounting for a hedge of a foreign currency firm commitment affect assets and liabilities reported on the balance sheet differently from the accounting for a hedge of a forecasted foreig...

Q: For each of the following scenarios, state whether descriptive, predictive

For each of the following scenarios, state whether descriptive, predictive, or prescriptive analytics tools would most likely be used. a. An insurance firm wants to analyze fraudulent claims to predic...

Q: Hedge Funds. What is a hedge fund? What type of

Hedge Funds. What is a hedge fund? What type of individual invests in a hedge fund?

Q: What are some differences between hedge funds and mutual funds?

What are some differences between hedge funds and mutual funds?

Q: All else being equal, will a call option with a high

All else being equal, will a call option with a high exercise price have a higher or lower hedge ratio than one with a low exercise price?

Q: According to the Black-Scholes formula, what will be the

According to the Black-Scholes formula, what will be the hedge ratio (delta) of a call option as the stock price becomes infinitely large? Explain briefly.

Q: According to the Black-Scholes formula, what will be the

According to the Black-Scholes formula, what will be the hedge ratio (delta) of a put option for a very small exercise price?

Q: The hedge ratio (delta) of an at-the-

The hedge ratio (delta) of an at-the-money call option on IBM is 0.4. The hedge ratio of an at-themoney put option is − 0.6. What is the hedge ratio of an at-the-money straddle position on IBM?

Q: Reconsider the determination of the hedge ratio in the two-state

Reconsider the determination of the hedge ratio in the two-state model (Section 16.2), where we showed that one-third share of stock would hedge one option. What would be the hedge ratio for each of t...

Q: Show that Black-Scholes call option hedge ratios increase as the

Show that Black-Scholes call option hedge ratios increase as the stock price increases. Consider a one-year option with exercise price $50 on a stock with annual standard deviation 20%. The Tbill rate...

Q: We will derive a two-state put option value in this

We will derive a two-state put option value in this problem. Data: S0 = 100; X = 110; 1 + r = 1.10. The two possibilities for ST are 130 and 80. a. Show that the range of S is 50 while that of P is 3...

Q: You are a corporate treasurer who will purchase $1 million of

You are a corporate treasurer who will purchase $1 million of bonds for the sinking fund in three months. You believe rates soon will fall and would like to repurchase the company’s sinking fund bonds...

Q: A manager is holding a $1 million bond portfolio with a

A manager is holding a $1 million bond portfolio with a modified duration of eight years. She would like to hedge the risk of the portfolio by short-selling Treasury bonds. The modified duration of T-...

Q: A corporation plans to issue $10 million of 10-year

A corporation plans to issue $10 million of 10-year bonds in three months. At current yields, the bonds would have modified duration of eight years. The T-note futures contract is selling at F0 = 100...

Q: Would a market-neutral hedge fund be a good candidate for

Would a market-neutral hedge fund be a good candidate for an investor’s entire retirement portfolio? If not, would there be a role for the hedge fund in the overall portfolio of such an investor?

Q: Why is it harder to assess the performance of a hedge fund

Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager?

Q: A hedge fund with $1 billion of assets charges a management

A hedge fund with $1 billion of assets charges a management fee of 2% and an incentive fee of 20% of returns over a money market rate, which currently is 5%. Calculate total fees, both in dollars and...

Q: A hedge fund with net asset value of $62 per share

A hedge fund with net asset value of $62 per share currently has a high water mark of $66. Is the value of its incentive fee more or less than it would be if the high water mark were $67?

Q: Reconsider the hedge fund in the previous problem. Suppose it is

Reconsider the hedge fund in the previous problem. Suppose it is January 1, the standard deviation of the fund’s annual returns is 50%, and the risk-free rate is 4%. The fund has an incentive fee of 2...

Q: Suppose a hedge fund follows the following strategy: Each month it

Suppose a hedge fund follows the following strategy: Each month it holds $100 million of an S&P 500 Index fund and writes one-month out-ofthe-money put options on $100 million of the index with exerci...

Q: The following is part of the computer output from a regression of

The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. A hedge fund manager believes that Waterworks is underpriced, with...

Q: Here are data on three hedge funds. Each fund charges its

Here are data on three hedge funds. Each fund charges its investors an incentive fee of 20% of total returns. Suppose initially that a fund of funds (FF) manager buys equal amounts of each of these fu...

Q: A hedge fund charges an incentive fee of 20% of any

A hedge fund charges an incentive fee of 20% of any investment returns above the T-bill rate, which currently is 2% but is subject to a high water mark. In the first year, the fund suffers a loss of 8...

Q: Which of the following is most accurate in describing the problems of

Which of the following is most accurate in describing the problems of survivorship bias and backfill bias in the performance evaluation of hedge funds? a. Survivorship bias and backfill bias both resu...

Q: Which of the following would be the most appropriate benchmark to use

Which of the following would be the most appropriate benchmark to use for hedge fund evaluation? a. A multifactor model. b. The S&P 500. c. The risk-free rate.

Q: With respect to hedge fund investing, the net return to an

With respect to hedge fund investing, the net return to an investor in a fund of funds would be lower than that earned from an individual hedge fund because of: a. Both the extra layer of fees and th...

Q: Which of the following hedge fund types is most likely to have

Which of the following hedge fund types is most likely to have a return that is closest to risk free? a. A market-neutral hedge fund. b. An event-driven hedge fund. c. A long-short hedge fund.

Q: How might the incentive fee of a hedge fund affect the manager’s

How might the incentive fee of a hedge fund affect the manager’s proclivity to take on high-risk assets in the portfolio?

Q: Why is it harder to assess the performance of a hedge fund

Why is it harder to assess the performance of a hedge fund portfolio manager than that of a typical mutual fund manager?

Q: Ken Webster manages a $400 million equity portfolio benchmarked to the

Ken Webster manages a $400 million equity portfolio benchmarked to the S&P 500 Index. Webster believes the market is overvalued when measured by several traditional fundamental/economic indicators...

Q: Calculate the elasticity of a call option with a premium of $

Calculate the elasticity of a call option with a premium of $6.00 and a strike price of $73.00. The call has a hedge ratio of .7, and the underlying stock’s price is currently $71.00. (Round your answ...

Q: You want to buy a stock that is currently selling for $

You want to buy a stock that is currently selling for $60. You forecast that in one year, the stock’s price will be either $110 or $20, with equal probabilities. There is a one-year call option on the...

Q: An investor in the common stock of companies in a foreign country

An investor in the common stock of companies in a foreign country may wish to hedge against the of the investor’s home currency and can do so by the foreign currency in the forward market a....

Q: A French business is due to pay $3 million in six

A French business is due to pay $3 million in six months’ time to a US supplier. In order to hedge against currency risk, the French business decides to sell euro futures immediately at €1 = $1.1306 a...

Q: Mithras plc is a UK business that is due to receive €

Mithras plc is a UK business that is due to receive €200,000 from a German customer in three months’ time. A money market hedge will be used to manage currency risk and the following borrowing rates a...

Q: Larunda plc operates a shipyard in the UK and has recently completed

Larunda plc operates a shipyard in the UK and has recently completed the building of a passenger ferry for a French business. The ferry has successfully completed its sea trials and final payment of €...

Q: Bernard L. Bilski and Rand A. Warsaw sought patent protection

Bernard L. Bilski and Rand A. Warsaw sought patent protection for a claimed invention that explains how buyers and sellers of commodities in the energy market can protect, or hedge, against the risk o...

Q: Hamilton Importing Corp. (HIC) imports goods from countries around

Hamilton Importing Corp. (HIC) imports goods from countries around the world for sale in Canada. On December 1, Year 3, HIC purchased 11,300 watches from a foreign wholesaler for DM613,000 when the sp...

Q: Access the 2017 consolidated financial statements for Barrick Gold Corporation by going

Access the 2017 consolidated financial statements for Barrick Gold Corporation by going to investor relations section of the company’s website. Answer the questions below. For each question, indicate...

Q: Nova Mine Engineering is a junior Canadian company with a variety of

Nova Mine Engineering is a junior Canadian company with a variety of operating subsidiaries and other undertakings that provide mine engineering and management services in Canada and in several less-d...

Q: On January 1, 2024, Avalanche Corporation borrowed $100,

On January 1, 2024, Avalanche Corporation borrowed $100,000 from First Bank by issuing a two-year, 8% fixed-rate note with annual interest payments. The principal of the note is due on December 31, 20...

Q: On January 1, 2024, Avalanche Corporation borrowed $100,

On January 1, 2024, Avalanche Corporation borrowed $100,000 from First Bank by issuing a two-year, 8% fixed rate note with annual interest payments. The principal of the note is due on December 31, 20...

Q: Air France–KLM (AF), a Franco-Dutch company

Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year end...

Q: Air France–KLM (AF), a Franco-Dutch company

Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements According to International Financial Reporting Standards. AF’s financial statements a...

Q: A conceptual question in accounting for derivatives is this: Should gains

A conceptual question in accounting for derivatives is this: Should gains and losses on a hedge instrument be recorded as they occur, or should they be recorded to coincide (match) with income effects...

Q: Sanctums, Inc., purchases wheat for use in its food manufacturing

Sanctums, Inc., purchases wheat for use in its food manufacturing process. Sanctums operates in a highly competitive industry and is rarely able to increase its sales price. ∙ On Jan...

Q: On January 1, 2024, JPS Industries borrowed $300,

On January 1, 2024, JPS Industries borrowed $300,000 from Austin Bank by issuing a three-year, floating rate note based on SOFR, with interest payable semiannually on June 30 and December of each year...

Q: On January 1, 2024, LLB Industries borrowed $200,

On January 1, 2024, LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. ∙ LLB entered into a two-year interest rate swa...

Q: LLB Industries borrowed $200,000 from Trust Bank by issuing

LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. ∙ LLB entered into a two-year interest rate swap agreement on Janua...

Q: On January 1, 2024, LLB Industries borrowed $200,

On January 1, 2024, LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. ∙ LLB entered into a two-year interest rate swa...

Q: On January 1, 2024, LLB Industries borrowed $200,

On January 1, 2024, LLB Industries borrowed $200,000 from Trust Bank by issuing a two-year, 10% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on Janu...

Q: On January 1, 2024, Oriole Company purchased $500,

On January 1, 2024, Oriole Company purchased $500,000 of Nest Corporation’s five-year, 4% notes at par, with interest receivable semiannually. The company classified the investment a...

Q: What are the advantages and disadvantages to a U.S.

What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? Explain why an MNC might use...

Q: Assume that the transactions listed in the first column of the following

Assume that the transactions listed in the first column of the following table are anticipated by U.S. firms that have no other foreign transactions. Place an “X” i...

Q: A U.S. professional football team plans to play an

A U.S. professional football team plans to play an exhibition game in the United Kingdom next year. Assume that all expenses will be paid by the British government, and that the team will receive a ch...

Q: Myrtle Beach Co. purchases imports that have a price of 400

Myrtle Beach Co. purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It can purchase a 90-day forward contract on Singapore dollars at $0.50...

Q: Blades, Inc., has recently decided to expand its international trade

Blades, Inc., has recently decided to expand its international trade relationship by exporting its roller blades to the United Kingdom. Jogs, Ltd., a British retailer, has committed itself to the annu...

Q: At the end of this month, you (the owner of

At the end of this month, you (the owner of a U.S. firm) are meeting with a Japanese firm to which you will try to sell supplies. If you receive an order from that firm, you will obtain a forward cont...

Q: Jim Logan, owner of the Sports Exports Company, will be

Jim Logan, owner of the Sports Exports Company, will be receiving about 10,000 British pounds about one month from now as payment for exports produced and sent by his firm. Logan is concerned about hi...

Q: The currencies of some Latin American countries, such as Brazil and

The currencies of some Latin American countries, such as Brazil and Venezuela, frequently weaken against most other currencies. What concept in this chapter explains this occurrence? Why don’t all U.S...

Q: You believe that interest rate parity and the international Fisher effect hold

You believe that interest rate parity and the international Fisher effect hold. Assume that the U.S. interest rate is presently much higher than the New Zealand interest rate. You have receivables of...

Q: 1 million euros in one year from selling exports. It did

1 million euros in one year from selling exports. It did not hedge this future transaction. Boston believes that the future value of the euro will be determined by purchasing power parity (PPP). It ex...

Q: Assume that the forward rate is an unbiased but not necessarily accurate

Assume that the forward rate is an unbiased but not necessarily accurate forecast of the future exchange rate of the yen over the next several years. Based on this information, do you think Raven Co....

Q: The treasurer of Glencoe, Inc., detected a forecast bias when

The treasurer of Glencoe, Inc., detected a forecast bias when using the 30-day forward rate of the euro to forecast future spot rates of the euro over various periods. He believes he can use this info...

Q: New York Co. has agreed to pay 10 million Australian dollars

New York Co. has agreed to pay 10 million Australian dollars (A$) in two years for equipment that it is importing from Australia. The spot rate of the Australian dollar is $0.60. The annualized U.S. i...

Q: Each of the following U.S. firms is expected to

Each of the following U.S. firms is expected to generate $40 million in net cash flows (after including the estimated cash flows from international sales, if there are any) over the next year. Ignore...

Q: Kayla Co. imports products from Mexico, and it will make

Kayla Co. imports products from Mexico, and it will make payment in pesos in 90 days. Interest rate parity holds. The prevailing interest rate in Mexico is very high, which reflects the high expected...

Q: Assume the following information: / Assume that the

Assume the following information: Assume that the Santa Barbara Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using...

Q: Assume the following information: / Assume that Riverside

Assume the following information: Assume that Riverside Corp. from the United States will receive 400,000 pounds in 180 days. Would it bebetter off using a forward hedge or a money market hedge? Subs...

Q: Can Brooklyn Co. determine whether currency options will be more or

Can Brooklyn Co. determine whether currency options will be more or less expensive than a forward hedge when considering both hedging techniques to cover net payables in euros? Why or why not?

Q: How can a firm hedge its long-term currency positions?

How can a firm hedge its long-term currency positions? Elaborate on each method.

Q: As treasurer of Tucson Corp. (a U.S.

As treasurer of Tucson Corp. (a U.S. exporter to New Zealand), you must decide how to hedge (if at all) future receivables of 250,000 New Zealand dollars 90 days from now. Put options are available fo...

Q: If interest rate parity exists, would a forward hedge be more

If interest rate parity exists, would a forward hedge be more favorable than, the same as, or less favorable than a money market hedge on euro payables? Explain

Q: Suppose your firm is a U.S. importer of Mexican

Suppose your firm is a U.S. importer of Mexican goods, and you believe that today’s forward rate of the peso is a very accurate estimate of the future spot rate. Do you think Mexican peso call options...

Q: Your firm exports goods to the United Kingdom, and you believe

Your firm exports goods to the United Kingdom, and you believe that today’s forward rate of the British pound substantially underestimates the future spot rate. Company policy requires you to hedge yo...

Q: Explain how a Malaysian firm can use the forward market to hedge

Explain how a Malaysian firm can use the forward market to hedge periodic purchases of U.S. goods denominated in U.S. dollars. Explain how a French firm can use forward contracts to hedge periodic sal...

Q: Cornell Co. purchases computer chips denominated in euros on a monthly

Cornell Co. purchases computer chips denominated in euros on a monthly basis from a Dutch supplier. To hedge its exchange rate risk, this U.S. firm negotiates a three-month forward contract three mont...

Q: Malibu, Inc., is a U.S. company that

Malibu, Inc., is a U.S. company that imports British goods. It plans to use call options to hedge payables of 100,000 pounds in 90 days. Three call options are available that have an expiration date 9...

Q: Wedco Technology of New Jersey exports plastics products to Europe. Wedco

Wedco Technology of New Jersey exports plastics products to Europe. Wedco decided to price its exports in dollars. Telematics International, Inc. (of Florida), exports computer network systems to the...

Q: Because Obisbo, Inc., conducts much business in Japan, it

Because Obisbo, Inc., conducts much business in Japan, it is likely to have cash flows in yen that will periodically be remitted by its Japanese subsidiary to the U.S. parent. What are the limitations...

Q: Assume that Carbondale Co. expects to receive S$500,

Assume that Carbondale Co. expects to receive S$500,000 in one year. The existing spot rate of the Singapore dollar is $0.60. The one-year forward rate of the Singapore dollar is $0.62. Carbondale cre...

Q: SMU Corp. has future receivables of 4 million New Zealand dollars

SMU Corp. has future receivables of 4 million New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position. Use any of the following info...

Q: If you were a U.S. importer of products from

If you were a U.S. importer of products from Europe, explain whether a weak U.S. economy would cause you to hedge your payables (denominated in euros) due a few months later if you expected that the w...

Q: As treasurer of Tempe Corp., you are confronted with the following

As treasurer of Tempe Corp., you are confronted with the following problem. Assume the one-year forward rate of the British pound is $1.59. You plan to receive 1 million pounds in one year. A one-year...

Q: You believe that IRP presently exists. The nominal annual interest rate

You believe that IRP presently exists. The nominal annual interest rate in Mexico is 14 percent, whereas the nominal annualinterest rate in the United States is 3 percent. You expect that annual infla...

Q: Assume that Calumet Co. will receive 10 million pesos in 15 

Assume that Calumet Co. will receive 10 million pesos in 15 months. It does not have a relationship with a bank at this time and, therefore, cannot obtain a forward contract to hedge its receivables a...

Q: You apply a regression model to annual data in which the annual

You apply a regression model to annual data in which the annual percentage change in the British pound is the dependent variable, and INF (defined as annual U.S. inflation minus U.K. inflation) is the...

Q: Virginia Co. has subsidiaries in both Hong Kong and Thailand.

Virginia Co. has subsidiaries in both Hong Kong and Thailand. Assume that the Hong Kong dollar (HK$) is pegged at $0.13 per Hong Kong dollar and will remain pegged. The Thai baht fluctuates against th...

Q: Indiana Co. expects to receive 5 million euros in one year

Indiana Co. expects to receive 5 million euros in one year from exports, and it wants to consider hedging its exchange rate risk. The spot rate of the euro as of today is $1.10. Interest rate parity e...

Q: Tampa Co. will build airplanes and export them to Mexico for

Tampa Co. will build airplanes and export them to Mexico for delivery in three years. The total payment to be received in three years for these exports is 900 million pesos. Today the peso’s spot rate...

Q: Red River Co. (a U.S. firm)

Red River Co. (a U.S. firm) purchases imports that have a price of 400,000 Singapore dollars; it has to pay for the imports in 90 days. The firm will use a 90-day forward contract to cover its payable...

Q: Evar Imports, Inc., buys chocolate from Switzerland and resells it

Evar Imports, Inc., buys chocolate from Switzerland and resells it in the United States. It just purchased chocolate invoiced at SF62,500; payment for the invoice is due in 30 days. Assume that the cu...

Q: Marson, Inc., has some customers in Canada and frequently receives

Marson, Inc., has some customers in Canada and frequently receives payments denominated in Canadian dollars (C$). The current spot rate for the Canadian dollar is $0.75. Two call options on Canadian d...

Q: Brooks, Inc., imports wood from Morocco. The Moroccan exporter

Brooks, Inc., imports wood from Morocco. The Moroccan exporter invoices these products in Moroccan dirham. The current exchange rate of the dirham is $0.10. Brooks just purchased wood for 2 million di...

Q: Refer to the previous problem. Assume that Brooks believes the cost

Refer to the previous problem. Assume that Brooks believes the cost of a long straddle is too high. However, call options with an exercise price of $0.105 and a premium of $0.002 and put options with...

Q: You own a U.S. exporting firm that will receive

You own a U.S. exporting firm that will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transaction costs. Today the oneyear interest rate in the United St...

Q: Explain how a U.S. corporation could hedge net receivables

Explain how a U.S. corporation could hedge net receivables in euros with futures contracts. Explain how a U.S. corporation could hedge net payables in Japanese yen with futures contracts

Q: Assume that interest rate parity exists. The annualized interest rate is

Assume that interest rate parity exists. The annualized interest rate is presently 5 percent in the United States for any term to maturity and is 13 percent in Mexico for any term to maturity. Dokar C...

Q: Each month, the Sports Exports Company (a U.S

Each month, the Sports Exports Company (a U.S. firm) receives an order for footballs from a British sporting goods distributor. The monthly payment for the footballs is denominated in British pounds,...

Q: Assume that interest rate parity exists. Today the one-year

Assume that interest rate parity exists. Today the one-year interest rate in Japan is the same as the one-yearinterest rate in the United States. You use the international Fisher effect when forecasti...

Q: Rebel Co. (a U.S. firm) has

Rebel Co. (a U.S. firm) has a contract with the government of Spain and will receive payments of 10,000 euros in exchange for consulting services at the end of each of the next 10 years. The annualize...

Q: San Fran Co. imports products. It will pay 5 million

San Fran Co. imports products. It will pay 5 million Swiss francs for imports in one year. Mateo Co. will also pay 5 million Swiss francs for imports in one year. San Fran Co. and Mateo Co. will also...

Q: Today the spot rate of the euro is $1.20

Today the spot rate of the euro is $1.20 and the oneyear forward rate is $1.16. A one-year call option on euros exists with a premium of $0.04 per unit and an exercise price of $1.17. You think the sp...

Q: Assume that the country of Dreeland has a currency (called the

Assume that the country of Dreeland has a currency (called the dree) that tends to move in tandem with the Chilean peso and is expected to continue to move in tandem with the Chilean peso in the futur...

Q: Explain how a U.S. corporation could hedge net receivables

Explain how a U.S. corporation could hedge net receivables in Malaysian ringgit with a forward contract. Explain how a U.S. corporation could hedge payables in Canadian dollars with a forward contract...

Q: Assume that Loras Corp. imported goods from New Zealand and needs

Assume that Loras Corp. imported goods from New Zealand and needs 100,000 New Zealand dollars 180 days from now. It is trying to determine whether to hedge this position. Loras has developed the follo...

Q: Lola Co. (a U.S. firm) expects

Lola Co. (a U.S. firm) expects to receive 10 million euros in one year. It does not plan to hedge this transaction with a forward contract or other hedging techniques. This transaction is its only int...

Q: Explain how a firm can hedge its translation exposure.

Explain how a firm can hedge its translation exposure.

Q: Bartunek Co. is a U.S.-based MNC that

Bartunek Co. is a U.S.-based MNC that has European subsidiaries and wants to hedge its translation exposure to fluctuations in the euro’s value. Explain some limitations when this MNC hedges translati...

Q: Would a more established MNC or a less established MNC be better

Would a more established MNC or a less established MNC be better able to effectively hedge its given level of translation exposure? Why?

Q: Blades, Inc. needs to order supplies two months ahead of

Blades, Inc. needs to order supplies two months ahead of the delivery date. It is considering an order from a Japanese supplier that requires a payment of 12.5 million yen payable as of the delivery d...

Q: The Sports Exports Company receives British pounds each month as payment for

The Sports Exports Company receives British pounds each month as payment for the footballs that it exports. It anticipates that the pound will depreciate over time against the U.S. dollar. 1. How can...

Q: Jim Logan, owner of the Sports Exports Company, is concerned

Jim Logan, owner of the Sports Exports Company, is concerned about the value of the British pound over time because his firm receives pounds as payment for footballs exported to the United Kingdom. He...

Q: Blustream, Inc., considers a project in which it will sell

Blustream, Inc., considers a project in which it will sell the use of its technology to firms in Mexico. It already has received orders from Mexican firms that will generate 3 million Mexican pesos (M...

Q: Baxter Co. is considering a project with Thailand’s government. If

Baxter Co. is considering a project with Thailand’s government. If it accepts the project, it will definitely receive one lump-sum cash flow of 10 million Thai baht in five years. The spot rate of the...

Q: Cantoon Co. is considering the acquisition of a unit from the 

Cantoon Co. is considering the acquisition of a unit from the French government. Its initial outlay would be $4 million. Cantoon will reinvest all the earnings in the unit. It expects that at the end...

Q: Burton Co., based in the United States, considers a project

Burton Co., based in the United States, considers a project in which it has an initial outlay of $3 million and expects to receive 10 million Swiss francs in one year. The spot rate of the Swiss franc...

Q: Carlotto Co. (a U.S. firm) will

Carlotto Co. (a U.S. firm) will definitely receive 1 million British pounds in one year based on a business contract it has with the British government. Like most firms, Carlotto Co. is risk averse an...

Q: Sazer Co. (a U.S. firm) is

Sazer Co. (a U.S. firm) is considering a project in which it produces special safety equipment. It will incur an initial outlay of $1 million for the research and development of this equipment. It exp...

Q: Louisville Co. is a U.S. firm considering a

Louisville Co. is a U.S. firm considering a project in Austria that will require an initial cash outlay of $7 million. Louisville will accept the project only if it can satisfy its required rate of re...

Q: As the Sports Exports Company exports footballs to the United Kingdom,

As the Sports Exports Company exports footballs to the United Kingdom, it receives British pounds. The check (denominated in pounds) for last month’s exports just arrived. Jim Logan, the owner of the...

Q: Slidell Co. (a U.S. firm) considers

Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the endof this year. It plans to hedge receivables of 10 million euros with a forward contract....

Q: Slidell Co. (a U.S. firm) considers

Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of one year. Although it realizes that its receivables are uncertain, it decides to hed...

Q: Duv Co. (a U.S. firm) is

Duv Co. (a U.S. firm) is planning to invest $2.5 million in a project in Portugal that will exist for one year. Its required rate of return on this project is 18 percent. It expects to receive cash fl...

Q: Nevada Co. is a U.S. firm that conducts

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Lynn Construction enters into a firm purchase commitment for equipment to be delivered on June 30, Year 1, for a price of £10,000. It simultaneously signs a forward foreign exchange contract for £10,0...

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Explain why hedge funds may be able to achieve higher returns for their investors than mutual funds do. Explain why the risk of hedge funds may differ from mutual funds. When the market is overvalued,...

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A critic recently claimed that hedge funds cause market volatility to increase when they publicize (and document) that a public corporation exaggerated its earnings. The critic argued that hedge funds...

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Carson Company would like to acquire Vinnet Inc., a publicly traded firm in the same industry. Vinnet’s stock price is currently much lower than the prices of other firms in the industry, because it o...

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As a portfolio manager, you are monitoring previous investments that you made in stocks and bonds of U.S. firms, and in stocks and bonds of Japanese firms. Although you plan to keep all of these inves...

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As a stock portfolio manager, you have investments in many U.S. stocks and plan to hold these stocks over a long-term period. However, you are concerned that the stock market may experience a temporar...

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You are the manager of a stock portfolio for a financial institution, and approximately 20 percent of your stock portfolio is in British stocks. You expect the British stock market to perform well ove...

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Q: Enron Corporation entered 2001 as the seventh largest public company in the

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Q: Jack Blair, the treasurer of the Simpson Corporation (SC)

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Q: Return to the WTM case in the chapter where it is said

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Q: Many species of cuckoos are brood parasites. The females lay their

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