Currency Risk Management Techniques Include Forward Hedges, Money Market Hedges

question 27

Essay

Currency risk management techniques include forward hedges, money market hedges, and option hedges. Draw a diagram showing the possible outcomes of these hedging alternatives for a foreign currency receivable contract. In your diagram, be sure to label the X and Y-axis, the put option strike price, and show the possible results for a money market hedge, a forward hedge, a put option hedge, and an uncovered position. (Note: Assume the forward currency receivable is British pounds and the put option strike price is $1.50/£, the price of the option is $0.04 the forward rate is $1.52/£ and the current spot rate is $1.48/£.)

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Definitions:

Direct Subsidies

Financial assistance provided by governments to individuals, organizations, or industries, aimed at supporting or promoting certain economic activities.

Federal Government

The national government of a federated state, which holds the authority to govern at a level above individual states or provinces.

Yearly Average

A statistical measure that represents the sum of values over a year divided by the number of values.

Great Depression

The Great Depression was a severe worldwide economic downturn that began in 1929 and lasted until the late 1930s.