Which of the following statement is INCORRECT? Question 23 options: 1) A call option allows the holder to buy the stipulated currency at a specified price. 2) A forward contract is an obligation while an option contract is not an obligation. 3) A forward contract allows the holder to exercise the right to buy or sell foreign currencies. 4) A put option allows the holder to sell the stipulated currency at a specified price.

Option contract is a contractual agreement between the buyer and the seller. In the option…

Answered: Which of the following statement is…

Business

Finance

Which of the following statement is INCORRECT?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 14QA

See similar textbooks

Related questions

Q: A. As an MNC, when would you use the spot rate? Explain your answer. B. If our MNC currency's is…

A: Survival is one of the main motives of business, and to survive it is necessary to grow. MNCs are…

Q: 47

A: Interest rate parity states that the difference between the interest rate of two currencies would b…

Q: n investor is bullish on the euro and believes it will increase against the Japanese Yen. The…

A: a) Assume the euro's spot price at the expiration date (market price) is ¥136/€ The investor's…

Q: Which one of the following statements is true regarding exchange rates in the flexible exchange rate…

A: Flexible or floating exchange rate system is the short-run equilibrium exchange rate that would…

Q: Hedging translation exposure with forward contracts can backfire if the currency being hedged…

A: The answer and the explanation can be seen below:

Q: 4-The spot exchange rate of OMR/USD is less than the forward exchange rate. What is your…

A: If forward rate is less than the spot rate, then the home currency is trading at discount.

Q: A. are only used by foreign currency traders to speculate on currency fluctuations. B. are generally…

A: Financial derivative: Derivative is a contract between two parties whose value is based on the…

Q: A foreign currency swap is simply an agreement between two parties to exchange one currency for…

A: Answer - Correct Answer is - FALSE.

Q: 8. A company has to pay a certain amount of a foreign currency in the future. It decides to hedge…

A: Note : As per our guidelines, we can only answer 1 question at once. Please post other questions…

Q: In a fixed-for-fixed currency swap where country A’s interest rate is higher than country B’s…

A: A fixed for fixed currency swap is one in which the counterparties enter in to agreement to pay…

Q: If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange…

A: In this question we have four options relating to hedging question and we need to choose the correct…

Q: Suppose you observe the following exchange rates and interest rates for the USD and THB: Bid…

A: According interest parity concept forward rate should be in equilibrium with interest rates.

Q: What three real-world complications keep purchasing power parity from being a complete explanation…

A: Purchasing power parity-It states that exchange rates between two currencies are in…

Q: Choose a,b,c,d,e for the following: Question 10 - Which of the following is true? a. An indirect…

A: Answer- Option (e)

Q: How does a company determine the fair value of a foreign currency forward contract? How does it…

A: The fair value of a foreign currency forward contract is determined by reference to changes in the…

Q: Assume that interest rate parity holds. When a currency trades at a forward premium,what does that…

A: When trading of currency is at forward premium, A situation where the currency’s forward price is…

Q: Which currency regime plays role of counter inflation anchor: Select one alternative: Free…

A: Solution Step (1) Inflation Anchor Conventional wisdom is that a financial organization can anchor…

Q: Which of the following factors influences the spread between forward and spot rates? a. which…

A: Spot rate is the current rate of the stock or bond or currency and forward rate is the price that is…

Q: If the U.S.A. imports more than it exports, then: O a. The supply of dollars is likely to exceed the…

A: The exchange rate of a country's currency as compared to other currencies depends upon its supply…

Q: Which of the following refers to exposure netting? 1. It is a strategy based on adjustments of the…

A: exposure netting is defined as a method of hedging transaction risk by offsetting exposure in one…

Q: a) If income level in Wetland increases substantially while income level in Driland remains…

A: Inflation denotes the rise in general price level in an economy. When there is inflation in an…

Q: All of the following are internal hedging techniques for foreign exchange exposure, except: *…

A: Hedging is a process that provides insurance against asset risk. Internal hedging methods are used…

Q: The advantage of over-the-counter products such as swaps or forwards contracts,relative to…

A: The question is multiple choice question. Required Choose the Correct Option.

Q: Exchange rate is: Select one: a. All of the given answers. b. The rate at which one currency can be…

A: The financial position of the company can be arrived from the income statement prepared by the…

Q: A foward exchange transactions involve ____________ exchange of foreign currencies at ________…

A: Forward exchange contracts are the derivative instruments that allow the buyer or seller to purchase…

Q: Which of the following statements relating to foreign currency translation and remeasurement is…

A: SOLUTION- ASC 830 PROVIDES THE ACCOUNTING AND REPORTING REQUIREMENT FOR FOREIGN CURRENCY…

Q: Explain how exchange rate fluctuations affect the return from a foreign market measured in dollar…

A: Introduction: Exchange rate is nothing but the country’s price expressed in terms of another…

Q: a). Describe briefly the nature of a swap and its primary component. b). Under what circumstances…

A: a. swap is a derivative financial instrument through which two parties exchange the cashflow or…

Q: ich of the following statements relating to foreign currency hedging is false? Instead of…

A: Hedge funds refer to the collection of money contributed by the investors in order to create a fund…

Q: why a firm should consider hedging net payables and recivables with currency options rather than…

A: Hedging is the process by which risk can be reduced. Options are the derivative instruments that…

Q: In which of the following relationships between the expected future spot rate (E(e)) of a foreign…

A: A speculator will sell foreign currency at present when it is expected that price will get lower in…

Q: exchange rate regime,

A: The exchange rate refers to the price of the money of a country and relates to the value of…

Q: When the futures price is equal to the spot rate of a given currency, and the foreign country…

A: Introduction: Exchange rate is the nothing but a rate at which two currencies are traded for each…

Q: What are the advantages or the disadvantages of hedging with currency options as opposed to future…

A: Hedging is used to insulate the investor of the risks of currency fluctuations in an international…

Q: Purchasing an option to buy foreign currency at a predetermined exchange rate in order to reduce…

A: Derivatives: Derivatives are some financial instruments which are meant for managing risk and…

Q: Which of the following reflects a hedge of net payables in British pounds by a U.S. firm? Group of…

A: The question is related Money Market hedge. In the given Statement foregin currency British pound is…

Q: The bid-ask spread on an exchange rate implies _______. A. the transaction cost of foreign exchange…

A: Step 1 The spread of a bid-ask is the difference between the asking and bid prices in the market. A…

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.

Question

Which of the following statement is INCORRECT?

Question 23 options:

1)	A call option allows the holder to buy the stipulated currency at a specified price.

2)	A forward contract is an obligation while an option contract is not an obligation.

3)	A forward contract allows the holder to exercise the right to buy or sell foreign currencies.

4)	A put option allows the holder to sell the stipulated currency at a specified price.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

dont use chat gpt Which of the following option is false? Select the most suitable answer. Select one: a. Forward contracts are popular in foreign exchange market. b. The value of short forward increases as the price of the asset decreases. c. A 1-year forward contract is an agreement where one counterparty has the obligation to buy an asset for the market price in 1-year time from the other counterparty. d. Forward contracts are not traded in any exchanges across the world. e. Forward contracts are negotiated before inception.
Choose a,b,c,d,e for the following: Question 10 - Which of the following is true? a. An indirect quote is the foreign currency price of the foreign country. b. A forward contract prevents upside gain. c. Gilt arises out of an action you cannot tell your parents about. d. If the market rate exceeds the cross rate, no-arbitrage is possible. e. The violation of interest rate parity motivates the activation of triangular arbitrage.
a)explain how to price a currency swap if either set of payments is at a floating rate. b)explain how a currency swap can be used to convert a loan in one currency into a loan in another currency, and provide some reasons for doing so. c)demonstrate that a currency swap contract is equivalent to a series of forward contracts. d)explain how a currency swap can be used to hedge a stream of foreign cash flows. e)define interest rate derivatives, and compare and contrast them against bond derivatives.
What is the relationship or link between the forward rate and the foreign currency option premium? An option's value declines over time, but it does not do it evenly. Explain what that means for option valuation? Classify the following as a transaction reported in a sub-component of the current account or the capital and financial accounts of the two countries involved: An American tourist pays for a hotel in Paris with his American Express card.
Since the U.S. company is a buyer, should not it focus on either a Forward contract or a "Call Option"? This case is about "Foreign Currency Liability," which is "Payable." Put Option is used when the company exercises selling options, but the case about includes that the company "regularly purchases." Can you please explain thoroughly? unless i have messed anything to grasp.
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.
7. How can we obtain a pay-domestic-floating, receive-foreign-fixed currency swap by using a pay-domestic-fixed, receive-foreign-fixed currency swap and an appropriate interest rate swap?
Which of the following refers to exposure netting? 1. It is a strategy based on adjustments of the times of payments that are made in foreign currencies. 2. It is a practice which implies using swap contracts that have a fixed currency exchange rate. 3. It is a method of hedging transaction risk by offsetting exposure in one currency with exposure in the same or another similar currency. 4. It is a strategy that involves using two distinct assets with positively correlated price movements where the investor takes opposing positions in each investment in an attempt to reduce the risk of holding just one of the securities.
Purchasing an option to buy foreign currency at a predetermined exchange rate in order to reduce exchange risk is called: A)transfer pricing. B)hedging. C)translating. D)cross-listing.
Question 22 Which of the following statements relating to foreign currency translation and remeasurement is correct? If a foreign entity's recording currency is not it's functional currency, but the functional currency is the reporting currency, translation using the current rate method is not required. if a foreign entity's recording currency is not it's functional currency, remeasurement into the functional currency using the temporal method is required If a foreign entity operates in a highly inflationary economcy, the reporting currency of the U.S. parent-the U.S. dollar, should be used. All of these statements are correct
What does the term "carry trade" mean? Group of answer choices Borrow in the domestic currency to earn only the higher yield of the dollar implied by the failure of uncovered interest rate parity (UIRP). Borrow in foreign currency to earn only the expected capital appreciation of the dollar implied by the failure of UIRP. Borrow in the domestic currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the failure of UIRP. Borrow in the foreign currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the failure of UIRP.
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".