Chapter 3, Problem 2SBD

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.

Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.

Explain how exchange rate fluctuations affect the return from a foreign market measured in dollar terms. Discuss the empirical evidence on the effect of exchange rate uncertainty on the risk of foreign investment. Would exchange rate changes always increase the risk of foreign investment? Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.

Foreign exchange risk may be best defined as:a. the chance of value change in foreign exchange ratesb. the chance that the demand for your currency will dropc. the chance that exchange rates will be fixedd. the political risk posed by foreign governments

If the firm had exposures in currencies such as Brazilian Real or Indonesian Rupiah,what options does the firm have in terms of hedging/foreign exchange risk management?

explain the nature of potential risk in international transactions and critically discuss how international traders might manage such risks via the derivative markets

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).