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Hedging with forward contracts

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Reference no: EM132853738

What are your thoughts on the below scenarios and provide an explanation as well Hedging with forward contracts 1

1.Your company will receive 1 million Turkish liras (TKL) in one year. To hedge this exposure with forward contracts you need to

  • Buy TKL forward,
  • Sell USD forward
  • Sell TKL forward.

2.Your company has to pay 1 million Swedish kronor (SEK) in 6 months. To hedge this exposure with forward contracts you need to

  • Buy SEK forward.
  • Buy USD forward
  • Sell SEK forward.

3.A forward contract makes a profit

  • When volatility is high.
  • Often when we sell forward emerging-market currencies.
  • Rarely, because of high transactions costs.
  • Roughly 50 percent of the time.

4.Which statement is false? Hedging with forward contracts:

  • Provides greater transparency on costs and revenues, allowing firms to make better pricing decisions.
  • Eliminates "background risk" allowing managers to make better decisions.
  • Reduces the volatility of profits.
  • Is a source of profits that can make our business more valuable

Hedging with forward contracts 2

1. Your company has a 1 million Euro receivable in one year. You decided to fully hedge with forward contracts.  

The one year forward rate is 1.22 USD/EUR.

How much will you receive in USD in one year?

2. Your company has a 1 million Brazilian real (BRL) payable in one year. You decided to fully hedge with forward contracts.  

The one year forward rate is 6 BRL/USD.

How much will you pay in USD in one year?

3.Your company will receive 1 million South African Rand (ZAR) in 3 months. You decided to fully hedge with forward contracts.  

The 3-month forward rate is 15 ZAR/USD.

How much will you receive in USD in one year?

Hedging with options 1

1.Which statement is false? You should always hedge with options when

  • The competition is unhedged.
  • The exchange rate volatility is high.
  • The transaction is uncertain.

2.Your company will receive 1 million euros in one year. You want to hedge the exchange rate risk. Which option should your company buy?

  • A call in the EUR
  • A put on the USD
  • A put on the EUR

3.Your company will pay 1 million British pounds (GBP) in one year. You want to hedge the exchange rate risk. Which option should your company buy?

  • A call on the GBP.
  • A call on the USD.
  • A put on the GBP.

Reference no: EM132853738

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