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Foreign exchange risk may be best defined as:
a. the chance of value change in foreign exchange rates
b. the chance that the demand for your currency will drop
c. the chance that exchange rates will be fixed
d. the political risk posed by foreign governments
Step by step
Solved in 3 steps
- Explain how exchange rate fluctuations affect the return from a foreign market measured in dollar terms. Discuss the empirical evidence on the effect of exchange rate uncertainty on the risk of foreign investment. Would exchange rate changes always increase the risk of foreign investment? Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.Does Arbitrage destabilize foreign exchange markets? Support your logic about that statementExplain how exchange rate fluctuations affect the return from a foreign market measured in dollar terms. Discuss the empirical evidence on the effect of exchange rate uncertainty on the risk of foreign investment.
- 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 riskHow can the company use currency options to hedge against exchange rate risk?The deterioration of economic conditions; deterioration of the value of the local currency in terms of the bank’s base currency; convertibility or transfer risks; market crisis are examples of what kinds of risk? Select one: a. Solvency risk b. Foreign exchange risk c. Sovereign risk d. Credit risk
- What do you know about arbitrage opportunity? Discuss with examples. Also, present a scenario of any type of international arbitrage if possible. If so, how would it be executed and how would market forces be affected? Does arbitrage opportunity destabilize foreign exchange markets?Which of the following is the risk due to exchange rates? Business risk Financial risk Market risk Interest rate risk Purchasing power risk Exchange rate riskIllustrate how to synthesize a forward hedging strategy by using only the money markets, in order to hedge against the foreign exchange risk.
- A price-taker in the foreign exchange market is a hedger who wants to avoid risk. a speculator who buys a currency at the current exchange rate, hoping that it will appreciate. a market participant who takes the current exchange rate to be the equilibrium exchange rate. a market participant who buys and sells currencies at the exchange rates quoted by large commercial banks.Would exchange rate changes always increase the risk of foreign investment? Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.Advantages and disadvantages of foreign exchange risk?
