International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Are there any limitations in the use of currency futures contracts when locking in a specific exchange rate at which company can sell all the pounds it expects to receive in each of the upcoming months?
The ABC Sports Company receives British pounds each month as payment for the footballs that it exports. It anticipates that the pound will depreciate over time against the Australian dollar. How can the ABC Sports Company use currency futures contracts to hedge against exchange rate risk? Are there any limitations in the use of currency futures contracts when locking in a specific exchange rate at which ABC Sports Company can sell all the pounds it expects to receive in each of the upcoming months?
Jack Smith is concerned that the pound may depreciate substantially over the next month, but he also believes that the pound could appreciate substantially if specific situations occur. Should Jack use currency futures or currency options to hedge the exchange rate risk? Is there any disadvantage of selecting this method for hedging?
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- A U.S. exporting firm may use foreign exchange futures to hedge its exposure to exchange rate risk. Its position in futures will depend in part on anticipated payments from its customers denominated in foreign currency.a. In general, however, should its position in futures be more or less than the number of contracts necessary to hedge these anticipated cash flows? (Hint: Think about the firm's stream of cash flows extending out over many years.)b. What other considerations might enter into the hedging strategy?arrow_forwardWhich 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.arrow_forwardA firm that has a sum of money denominated in a foreign currency that plans to later convert it to dollars could hedge by which of the following methods. Explain why A. a call on the foreign currency B. a long futures or forward on the foreign currency C. a short put on the foreign currency futures D. all of the above E. none of the abovearrow_forward
- Indian interest rates are normally substantially higher than U.S. interest rates. Assuming that interest rate parity exists, do you think hedging with a forward rate will be beneficial if the spot rate of the Indian rupee is expected to decline slightly over time? Will hedging with a money market hedge be beneficial if the spot rate of the Indian rupee is expected to decline slightly over time (assume zero transaction costs)? What are some limitations on using currency futures or options that may make it difficult for you to perfectly hedge against exchange rate risk over the next year or so?arrow_forwardHow can the company use currency futures contracts to hedge against exchange rate risk?arrow_forwardSuppose, on a certain day in February, a speculator observes the following prices in the foreign exchange and currency futures markets: GBP/USD spot: 1.6465 March futures: 1.6425 September futures: 1.6250 December futures: 1.6130 The speculator thinks that the markets are overestimating the weakness of sterling (GBP) against the dollar. How can she act on this view to make a profit? Under what circumstances do her actions lead to a loss?arrow_forward
- The prevailing one-year risk-free interest rate in Argentina is higher than in the U.S. and will continue to be higher over time. Sycamore Co. believes the international Fisher effect (IFE) can be used to derive the best forecast of the peso's exchange rate movement over time. In contrast, you believe that the prevailing spot rate is the best forecast of the future spot rate. Based on your opinion, will Sycamore Co. typically overestimate the future spot rate, underestimate the future spot rate, or create an unbiased forecast (similar chance of overestimating or underestimating the future spot rate) of the Argentine peso? Briefly explain.arrow_forwardWhen the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the domestic interest rate, astute investors may attempt to simultaneously __________ the foreign currency, invest it in the foreign country, and ___________ futures in the foreign currency. Select one: a. buy; buy. b. sell; buy. c. buy; sell. d. sell; sell.arrow_forwardA financial institution has assets denominated in British pound sterling of $125 million andsterling liabilities of $100 million.a) What is the FI's net exposure?b) Is the FI exposed to a dollar appreciation or depreciation?c) How can the FI use futures or forward contracts to hedge its FX rate risk? d) What is the number of futures contracts to be utilized to hedge fully the FI's currencyrisk exposure?e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI'scash position?f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impacton the FI's futures position.arrow_forward
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