Foreign Exchange RIsk Movement OT

Question 1

Transaction risk?

Answer 1

We buy goods in a different currency. But I won’t pay these goods for another month and exchange rate might change for better or worse

Question 2

What is a translation risk?

Answer 2

I work in pounds but I have factory that uses dollars. Need to do SFP in pounds (needs book gain or loss)

Question 3

What is an economic risk?

Answer 3

Harder to collect money from customers in a foreign country

Political risks in a foreign country

Question 4

How are exchange rates in decimal places?

Answer 4

To four decimal places

Question 5

When we receive money?

Answer 5

Bank makes the profit

Question 6

Issue with invoicing in home currency?

Answer 6

A big customer that insists on invoicing in dollars but we’re based in the UK. There’s eschange rate movements

Question 7

What is leading and lagging?

Answer 7

If I own money in a foreign currency, either pay quickly or delay paying which way we expect exchange rate to move

Question 8

What is netting?

Answer 8

Use dollar receipts to make dollar payments. Only at risk on net amount

Question 9

What is matching?

Answer 9

Create an expense in dollars to cancel the income in dollars. Trying to remove foreign exchange risk

Question 10

What is a forward contract?

Answer 10

A rate quoted today to apply to a fixed amount on a fixed future date

Question 11

Why is premium subtracted?

Answer 11

As the dollar is strengthening, one pound will buy you fewer dollars

Question 12

Calculated forward?

Answer 12

Spot - premium

Question 13

What happens with a discount in forward contracts?

Answer 13

Spot + discount

Question 14

What happens in money market hedging (receive money)?

Answer 14

Borrow $’s now. Then convert to £’s now at spot. We then deposit the £s for 3 months

Question 15

What happens when deposit matures in money market hedging?

Answer 15

We receive £3m fixed in 3 months

Question 16

Process when receiving money in a hedge

Answer 16

Borrow
Convert
Deposit

Question 17

Futures and forwards similarity

Answer 17

Rate converted now that converts money on a future date

Question 18

What is futures?

Answer 18

Rate quoted now that applies to a transaction at a fixed rate (e.g. a quarter)

Question 19

How are futures trades?

Answer 19

On an exchange. Can be traded like shares (buy and sell, usually for speculative purposes)

Question 20

How can financial managers use hedging?

Answer 20

To remove the risk from transactions

Question 21

Why leave transaction at risk in futures?

Answer 21

Convert at whatever spot is on 10th August

Question 22

When spot rate goes up and down (futures)?

Answer 22

So does the futures

Question 23

What are options?

Answer 23

An option is the right to convert at fixed rate on a future date.

Question 24

Choice in options?

Answer 24

Choice on date of transaction whether to exercise the right or to convert at spoit

Question 25

Forward rates and choice?

Answer 25

Have to convert at the forward rate. There is no other option

Question 26

Disadvantage of option?

Answer 26

Need to pay for the option (premium) whether or not we exercise it

Question 27

What is a call option?

Answer 27

The right buy a currency at a fixed rate

Question 28

What is a put option?

Answer 28

The right to sell $s at a fixed rate