Exchange rate fluctuations can be used as a tool of speculation by speculators. Make an example of how a speculator can profit by taking advantage of exchange rate fluctuations with Future contracts by taking Long positions and Short positions.

Exchange rate fluctuations can be used as a tool of speculation by speculators. Make an example of how a speculator can profit by taking advantage of exchange rate fluctuations with Future contracts by taking Long positions and Short positions.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 1CT

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

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A price-taker in the foreign exchange market is a hedger who wants to avoid risk. a speculator who buys a currency at the current exchange rate, hoping that it will appreciate. a market participant who takes the current exchange rate to be the equilibrium exchange rate. a market participant who buys and sells currencies at the exchange rates quoted by large commercial banks.
Which of the following best describes the terms 'long forward position' and 'short forward position' in foreign exchange trading? A short forward position is holding a currency for a short duration, while a long forward position is holding it for a longer period. A short forward position means you have agreed to sell a currency in the future, while a long forward position means you have agreed to buy it in the future. A long forward position is when you expect the currency's future spot rate to decrease, and a short forward position is when you expect it to increase. A long forward position means you have agreed to sell a currency in the future, and a short forward position means you have agreed to buy it in the future.
To hedge payables, the firm will purchase a currency call option on the payable foreign currency. The firm can use the call option to buy foreign currency at a specified price. Why should the company, in this case, purchase a call option than a Forward contract? Maybe to make it easy on me, you can illustrate the answer by highlighting the situations suitable for options and Forward contracts. For example, "when this situation occurs....., then that hedging we should use .... because of XYZ reasons/effects on profitability".
What is a long position in foreign exchange? Does a successful Long position mean the currency price becomes lower than what you bought it?
Does Arbitrage destabilize foreign exchange markets? Support your logic about that statement
Hedgers should buy calls if they are hedging an expected outflow of foreign currency. True or False ? Explain.
Explain the nature of potential risks in international transactions and critically discuss how international traders might manage such risks via the derivative markets. b. Critically examine why a firm should consider hedging net payables or net receivables with currency options rather than: (i) forward contracts, and (ii) future contracts. c. What are the advantages or the disadvantages of hedging with currency options as opposed to future contracts in international financial transactions?(Give examples and use relevant financial charts to illustrate your answer).
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