1) Hedging With Currency Derivatives. Assume that U.S. firms that have no other
ID: 2653819 • Letter: 1
Question
1) Hedging With Currency Derivatives. Assume that U.S. firms that have no other foreign transactions anticipate the forward purchase transaction. What are possible ways to hedge the transactions according to the following scenario? Georgetown Co. plans to purchase Japanese goods denominated in yen.
Forward purchase, sell futures, purchase puts
Forward sale, sell futures, purchase puts
Forward purchase, buy futures, purchase puts
Forward purchase, buy futures, purchase calls
2) Hedging With Currency Options. When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging? Complete each sentence: A call option can hedge a firm's future _______ denomin-ated in euros. It effectively locks in the maximum price to be paid for euros. A put option on euros can hedge a U.S. firm's future ________ denominated in euros. It effectively locks in the minimum price at which it can exchange euros received.
Equity, net profit
Net profit, equity
Receivables, payables
Payables, receivables
3) Currency Options. Differentiate between a currency call option and a currency put option. Complete this sentence: A currency call option provides the _____ to ______a specified currency at a specified price within a specified period of time. A currency put option provides the _____to _____a specified currency for a specified price within a specified period of time.
Right, sell, right, purchase
Obligation, purchase, obligation, sell
Right, purchase, right, sell
Obligation, sell, obligation, purchase
Forward purchase, sell futures, purchase puts
Forward sale, sell futures, purchase puts
Forward purchase, buy futures, purchase puts
Forward purchase, buy futures, purchase calls
Explanation / Answer
1. The American firm requires purchasing Japanese goods in future in Japanese Yen, thus, the firm should lock the future price today to save from price rise in goods.
Therefore, the firm should choose to purchase forward, or buy futures, or purchase of call.
Therefore, the correct answer is “Forward purchase, buy Futures, Purchase calls”.
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