International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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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.
Exchange rates can move up or down, and spot rates could move favourably as well as adversely. However, many companies prefer to hedge their currency risks by fixing an exchange rate now for a future transaction, even if this means that it will not be able to benefit from any favourable future movement in the exchange rate.
Required
Discuss the methods of hedging exposures to foreign exchange risk.
Hedgers should buy calls if they are hedging an expected outflow of foreign currency.
True or False ? Explain.
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- 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 governmentsarrow_forwardTo 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".arrow_forwardHow can the company use currency options to hedge against exchange rate risk?arrow_forward
- Which of the following is/are TRUE with respect to spot market liquidity? I. The market liquidity improves if more buyers and sellers willing to participate in the currency trading. II. The spot markets for heavily traded currencies such as the Euro and Pound are very liquid. III. A currency's liquidity affects the ease with which an MNC can obtain or sell that currency. IV. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate. A. I, II, III B. I, III, IV C. II, III, IV D. I, IIarrow_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_forwardIn a money-market hedge you either borrow or invest in a foreign currency at foreign interest/deposit rates and then do the opposite in the U.S. If the theory of interest rate parity (IRP) holds, a money-market hedge and forward rate should yield the same outcomes. Group of answer choices True Falsearrow_forward
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