Podcast
Questions and Answers
What is the primary benefit of hedging using the currency options market?
What is the primary benefit of hedging using the currency options market?
- Increasing the transaction exposure
- Reducing the option premium
- Eliminating exchange rate risk
- Protecting the downside while benefiting from the upside (correct)
What does the holder of an option have the right to do?
What does the holder of an option have the right to do?
- Buy/sell an asset at a market price on a pre-determined date without the obligation to do so
- Buy/sell an asset at a pre-specified price on a pre-determined date with an obligation to do so
- Buy/sell an asset at a pre-specified price on a pre-determined date without the obligation to do so (correct)
- Buy/sell an asset at a market price on a pre-determined date with an obligation to do so
What is the cost to the hedger for using currency options?
What is the cost to the hedger for using currency options?
- The option premium (correct)
- The forward contract rate
- The transaction exposure
- The exchange rate risk
What is the hedger's situation in the given example?
What is the hedger's situation in the given example?
What is the purpose of buying a 'Put option' or 'Call option' in hedging?
What is the purpose of buying a 'Put option' or 'Call option' in hedging?
When does the payment to the US Exporter need to be made?
When does the payment to the US Exporter need to be made?
What is the main difference between a forward market hedge and a currency option hedge?
What is the main difference between a forward market hedge and a currency option hedge?
What would be the outcome if the Mexican firm had remained unhedged and the spot rate on 21st August turned out to be USD/MXN 19.00?
What would be the outcome if the Mexican firm had remained unhedged and the spot rate on 21st August turned out to be USD/MXN 19.00?
What is the key characteristic of a money market hedge?
What is the key characteristic of a money market hedge?
Why might a money market hedge and a forward market hedge not always be perfect substitutes?
Why might a money market hedge and a forward market hedge not always be perfect substitutes?
What is the exchange rate risk that the US firm is exposed to in the example?
What is the exchange rate risk that the US firm is exposed to in the example?
How does the US firm realize USD 10,912 today in the money market hedge?
How does the US firm realize USD 10,912 today in the money market hedge?
What is the purpose of entering into a forward foreign exchange contract in managing transaction exposure?
What is the purpose of entering into a forward foreign exchange contract in managing transaction exposure?
What is the exchange rate at which the Mexican firm will sell the US Dollar 100,000 90 days forward in the given example?
What is the exchange rate at which the Mexican firm will sell the US Dollar 100,000 90 days forward in the given example?
What is the amount of Mexican Pesos the Mexican firm will receive as per the forward contract?
What is the amount of Mexican Pesos the Mexican firm will receive as per the forward contract?
What is the main advantage of hedging in managing transaction exposure?
What is the main advantage of hedging in managing transaction exposure?
What is the term for the risk of potential loss due to adverse movement in the exchange rate between the time the foreign exchange exposure is created and the time the payment is received?
What is the term for the risk of potential loss due to adverse movement in the exchange rate between the time the foreign exchange exposure is created and the time the payment is received?
What is the consequence of hedging in terms of potential gains?
What is the consequence of hedging in terms of potential gains?
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