Suppose That the Exchange Rate Is €1

question 97

Multiple Choice

Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts) are available on the London exchange in units of €10,000 with strike prices of £0.80 = €1.00. Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of €1.25 = £1.00. For a U.K. firm to hedge a €100,000 receivable,

• A) buy 10 call options on the euro with a strike in pounds sterling.
• B) buy 8 put options on the pound with a strike in euro.
• C) buy 10 put options on the euro with a strike in pounds sterling.
• D) buy 8 call options on the pound with a strike in euro.
• E) both a and b
• F) both c and d

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Definitions:

NPV Projects

Projects that are evaluated based on the Net Present Value method, helping in deciding whether they contribute positively to the company's value.

Soft Rationing

Refers to the internal limitations set by a company on the funds allocated for capital projects, despite having a strong financial position.

Hard Rationing

A situation in corporate finance where there is a strict limit on the amount of new equity a company can issue.

Operating Cash Flow

Operating cash flow refers to the cash generated by a company's normal business operations, indicating whether a company is able to generate sufficient positive cash flow to maintain and grow its operations.