Question

1) Your firm is exposed to $20 million in foreign exchange rate risk through its deposit at a German bank and wants to use euro contracts to hedge. The CME offers euro contracts for 125,000 euros and the euro currently equals $1. What should your firm do to fully hedge this exchange rate risk?

Select one:

A. Buy 160 CME euro contracts

B. Sell 160 CME euro contracts

C. Buy 40 CME euro contracts

D. Sell 40 CME euro contracts

E. None of the above Question

2) Following the sale of new corporate securities by an investment banking syndicate,

Select one: A. investors have a direct financial claim against the investment banking syndicate.

B. investors have an indirect financial claim against the investment banking syndicate.

C. investors have a direct financial claim against the issuing corporation.

D. the investment banking syndicate has a direct financial claim against the issuing corporation.

Answer 1

1) Optimal number of contracts = (Size of desired underlying portfolio / Size of one contract) * Exchange rate

Where,

Size of desired underlying portfolio = $20 million or $120,000,000

Size of one contract = 125,000 euros

Exchange rate = $1/euro or 1 euro/$

Therefore,

Optimal number of contracts = ($120,000,000/ 125,000 euros) * 1 euro/$

= 120,000,000 /125,000 = 160

Therefore selling 160 CME euro contract will fully hedge this exchange rate risk

Therefore correct answer is option B. Sell 160 CME euro contracts

2) Following the sale of new corporate securities by an investment banking syndicate,

The correct statement is investors have a direct financial claim against the issuing corporation

Therefore correct answer is option C. investors have a direct financial claim against the issuing corporation.

Investment banking syndicate work as underwriter and agree to buy the securities from the corporation and resell them to other security to the investors but investors have a direct financial claim against the issuing corporation.