1. List the factors that affect currency put options, and briefly explain the relationship that exists for each.

2. Assume that the annual U.S. interest rate is currently 8% and Germany's annual interest rate is currently 9%. The euro's 1-year forward rate currently exhibits a discount of 2%. (a) Does IRP exist? (b) Can a U.S. firm benefit from investing funds in Germany using CIA? (c) Can a German subsidiary of a U.S. firm benefit by investing funds in the United States through CIA?

3. Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased. Hudson's best guess of its future peso cash flows to be received has not changed. However, its valuation has declined as a result of the increase in political risk. Explain why.