8. Recognizing Exposure to Exchange Rate Risk (40 points)

Recall that when you created your business idea, it was assumed that your receivables would be denominated in the foreign currency of China upon the sale of your products.

1. Describe your exposure to exchange rate risk. That is, describe the exchange rate conditions affecting the performance of your business.
2. Is your business subject to transaction exposure? economic exposure? translation exposure? Explain why your business is or is not subject to each of these types of exposure.

Hedging with Forward Contracts

1. Given your exposure to exchange rate risk, explain how you could use forward contracts to hedge.
2. Explain how you could use currency options to hedge your exposure.
3. Review the currency options quotations for the foreign currency of concern inThe Wall Street Journal, or from an Internet source, and determine the premium that would be paid to be able to sell the currency at today's spot rate. (If the currency option data are not available for the currency of concern, skip this question.)

Using Futures Quotes

Go tohttp://www.cme.com. Determine the prevailing futures price of the main foreign currency for your business. Go tohttp://www.oanda.comand determine the prevailing spot rate. Would you hedge any transactions for your business based on the futures price relative to the spot rate.