Question
Your company will receive 1 million Turkish liras (TKL) in one year. To hedge this exposure with forward contracts you need to Buy TKL forward,
Your company will receive 1 million Turkish liras (TKL) in one year. To hedge this exposure with forward contracts you need to
- Buy TKL forward,
- Sell USD forward
- Sell TKL forward.
2.Your company has to pay 1 million Swedish kronor (SEK) in 6 months. To hedge this exposure with forward contracts you need to
- Buy SEK forward.
- Buy USD forward
- Sell SEK forward.
3.A forward contract makes a profit
- When volatility is high.
- Often when we sell forward emerging-market currencies.
- Rarely, because of high transactions costs.
- Roughly 50 percent of the time.
4.Which statement is false? Hedging with forward contracts:
- Provides greater transparency on costs and revenues, allowing firms to make better pricing decisions.
- Eliminates "background risk" allowing managers to make better decisions.
- Reduces the volatility of profits.
- Is a source of profits that can make our business more valuable
Hedging with forward contracts 2
1. Your company has a 1 million Euro receivable in one year. You decided to fully hedge with forward contracts.
The one year forward rate is 1.22 USD/EUR.
How much will you receive in USD in one year?
2. Your company has a 1 million Brazilian real (BRL) payable in one year. You decided to fully hedge with forward contracts.
The one year forward rate is 6 BRL/USD.
How much will you pay in USD in one year?
3.Your company will receive 1 million South African Rand (ZAR) in 3 months. You decided to fully hedge with forward contracts.
The 3-month forward rate is 15 ZAR/USD.
How much will you receive in USD in one year?
Hedging with options 1
1.Which statement is false? You should always hedge with options when
- The competition is unhedged.
- The exchange rate volatility is high.
- The transaction is uncertain.
2.Your company will receive 1 million euros in one year. You want to hedge the exchange rate risk. Which option should yourcompany buy?
- A call in the EUR
- A put on the USD
- A put on the EUR
3.Your company will pay 1 million British pounds (GBP) in one year. You want to hedge the exchange rate risk. Which option should yourcompany buy?
- A call on the GBP.
- A call on the USD.
- A put on the GBP.
Step by Step Solution
3.29 Rating (158 Votes )
There are 3 Steps involved in it
Step: 1
The detailed answer for the above question is provided below 1 To hedge exposure to receive 1 millio...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started