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- In the Mundell-Fleming model with floating, exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when the money supply is reduced. What would happen if exchange rates were fixed rather than floating?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.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 risk
- How can the company use currency options to hedge against exchange rate 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?how interest rate impact the foreign exchange market? how foreign exchange market impacts interest rate?