Reference no: EM132900466

Describe your exposure to exchange rate risk. That is, describe the exchange rate conditions affecting the performance of your business.

Is your business subject to transaction exposure? Economic exposure? Translation exposure? Explain why your business is or is not subject to each of these types of exposure.

Given your exposure to exchange rate risk, explain how you could use forward contracts to hedge.

Explain how you could use currency options to hedge your exposure.

Review the currency options quotations for the foreign currency of concern from an online source, and determine the premium that would be paid to be able to sell the currency at today's spot rate. (If the currency option data are not available for the currency of concern, skip this question.)

Recall that it was assumed that your receivables would be denominated in the foreign currency of concern. For this question only, assume that you could switch your pricing policy so that the receivables would be denominated in dollars instead of the foreign currency.
How would this switch affect the transaction exposure and the economic exposure of your business? Explain the conditions that could still cause the performance of your business to be affected by exchange rate movements.