Explain the differences and similarities between Forward, Futures, and Options
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1. Explain the differences and similarities between Forward, Futures, and
Options.
2. Explain why there can be a Long-Term Funding Deficit
related to the company's
3. Explain the meaning of international parity conditions, and why they can
used to predict exchange rates.
4. Explain the meaning of foreign exchange exposures and types
foreign exchange exposure faced by multinational companies.
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Solved in 3 steps
- Discuss the following barriers to international diversification. 1. Segmented markets2. Lack of liquidity3. Exchange rate controls4. Less developed capital markets5. Exchange rate risk6. Lack of informationA key issue facing financial executives of multinational firms is exposure to exchange rate changes.a. Define exposure, differentiating between accounting and economic exposure. What role does inflation play?b. Describe at least three circumstances under which economic exposure is likely to exist? c. Of what relevance are the international Fisher effect and purchasing power parity to your answers to parts a and b? d. What is exchange risk, as distinct from exposure1. Explain the differences and similarities between Forward, Futures, andOptions. Then why can there be a Long Term Funding Deficit related to a company's cash flows? and Explain the meaning of international parity conditions, and why it can be used to predict exchange rates. and what is the meaning of foreign exchange exposure and types of foreign exchange exposure faced by multinational companies.
- 1.Examine the role of stock , foreign and derivatives market in an economy. 2.Evaluate the challenges for International Financial systems. 3.Examine possible sources for these challenges and mitigation responses.Transaction exposure: A. measures the extent to which foreign exchange volatility may affect a firm's future ongoing revenues and costs. B. measures the effects of FX changes on the balance sheet of the firm. C. refers to the extent to which the value of the firm's cash flows may be affected by changes in the exchange rate. D. tries to measure the impact of unexpected exchange rate fluctuations on the net present value of the firm's future cash flows.An example of transaction exposure is when Question 4 options: companies have obligations for the purchase of goods at previously agreed prices. companies borrow funds in domestic currency. there is an impact of currency exchange rate changes on the reported financial statements of a company. there is a long-term effect of changes in exchange rates. changing exchange rates persists on future prices, sales, and costs
- Economic exposure refers to: A. the exposure of a firm's cash flows to exchange rate fluctuations. B. the exposure of a country's economy (specifically GNP) to exchange rate fluctuations. C. the exposure of a firm's international contractual transactions to exchange rate fluctuations. D. the exposure of a firm's financial statements to exchange rate fluctuations. E. the exposure of a firm's local currency value to transactions between foreign exchange traders.Foreign exchange risks a. Occur when cash flows are affected by currency exchange rates b. May be managed with forwards contracts c. May be managed with futures contracts d. Both a) and b) e. Both a) and c)Which hedging strategy uses an exchange rate agreed to today for future delivery of currency to minimize the financial institution’s risk exposure? a. Hedging with forwards. b. On balance sheet hedging. c. Off balance sheet hedging. d. Spot hedging.
- Title: Identification Things to do: 1. A second function of the foreign exchange market is to provide exchange possibility that unpredicted changes future exchange rates adverse consequences for the firm. insurance against risk, which is the in will have exchange rate is the rate foreign exchange dealer 2. The at which a converts currency into another one currency on a particular day. 3. The value of a is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies. 4. A parties agree exchange occurs to exchange currency when two and execute the deal at some specific date in the future. 5. rates governing such future transactions are referred to as forward exchange rates. 6. Changes in be problematic for an business. exchange rates can international 7. A is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. 8. When a firm enters into a it is taking out possibility…Foreign exchange risk or exchange rate risk is a financial risk that occurs when a financialdeal is denominated in a currency other than that of the base currency of the company.Explain the following types of risks that international firms are exposed to:a. Transaction riskb. Translation riskc. Economic riskWhich of the following is/are TRUE with respect to spot market liquidity? I. The market liquidity improves if more buyers and sellers willing to participate in the currency trading. II. The spot markets for heavily traded currencies such as the Euro and Pound are very liquid. III. A currency's liquidity affects the ease with which an MNC can obtain or sell that currency. IV. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate. A. I, II, III B. I, III, IV C. II, III, IV D. I, II