Question 1 - What are three of the possible choices that an exporter can make (i

Question

Question 1 - What are three of the possible choices that an exporter can make (in terms of currency) for a specific transaction?

Question 2 - Explain the three different types of exchange rates. Find the three exchange rates for a currency of your choice and explain the values you find.

Question 3 - What does it mean for a firm to retain its currency fluctuation risk in a transaction?

Question 4 - There are three types of hedges that a firm can use to protect itself against transaction exposure. Choose one of them and explain it.

Explanation / Answer

Q-1 i) Currency of exporter ii) Currency of Customer iii) Gererally Accepted (USD) Q-2 i) Fixed Rate :- Fixed or pegged exchange rate refers to the system in which the rate of exchange of a currency is fixed or pegged in terms of gold or another currency. Ex.- INR 62 for all the transactions in August Month against $1. ii) Flexible Rate: Flexible or floating exchange rate refers to the system in which the rate of exchange is determined by the forces of demand and supply in the foreign exchange market. It is free to fluctuate according to the changes in the demand and supply of foreign currency. Ex.- prevailing rate in market for INR against $ as 64.55 INR iii) Multiple Rates: Multiple rates refer to a system in which a country adopts more than one rate of exchange for its currency. Different exchange rates are fixed for importers, exporters, and for different countries. Q-3 Risk retention is the opposite of protecting oneself from currency fluctuations. Q-4 Forward market hedges: can protect a company from currency fluctuations by selling forwarda future receivable in a foreign currency, or purchasing forward the currency necessary to cover a foreignpayable.

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