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:

Annual Rate

The interest rate for a loan or investment over a one-year period, often used to compare the yield of financial products.

Student Loans

Loans taken by students to cover higher education expenses, expected to be repaid with interest.

Simple Interest Rates

Interest calculated only on the principal amount of a loan or deposit, without compounding over time.

Outstanding Balance

The amount of money owed on a loan, credit card, or any other debt that remains unpaid.