FIN 6644 Practice Question Set 1 (1) (Compatibility Mode) -Word ailings Review View Tell me what you want to do 2abcDa Aab EEmphasis Heading 11 Normal Strong Subtitle Tit Paragraph Style c) Company Y will save 5 basis points per year on $10,000,000 $5,000 per year d) Company Y will only break even on the deal 12 Your firm is bidding on a large construction contract in a foreign country. This contingent exposure could best be hedged a) With put options on the foreign currency b) With call options on the foreign currency c) Both a) and b), depending upon the specifics (\"the rest of the story\") d) With futures contracts. 13 A Japanese EXPORTER has a 1,000,000 receivable due in one year. Estimate the cost today of an options strategy that will eliminate exchange rate risk. -1 Listed Options Strike $1.25-1.00S0.0075 per S0.01 per e S1.00 100 0.0075 per 100 S0.01 per 100 Puts Cally Euro 62.500 Yen $12.500.000 a) S20,000. b) S5.000 c) $12.500 d) None of the above 4 XYZ Corporation. located in the United States, has au accounts payable obligation of 750 million payable in oue year to a bank in Tokyo. Which oft
12. c) Both a) and b), depending upon the specifics ( \" the rest of the story\")
Explanation :
Put option provides right to sell foreign currency to holder and obligation to purchase foreign currency to writer at specified time and at specified rate whereas, Call option provides right to purchase foreign currency to holder and obligation to sell foreign currency to writer at specified time and at specified rate. Therefore, the Company can opt to become either Put option holder or Call option writer. On the other hand, a futures contract is a standardized forward contract to either buy or sell an asset on a publicly-traded exchange. As the given contract is not standardized, the exposure could not be hedge with futures contracts.
13. a) $ 20000
Explanation :
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