why a firm should consider hedging net payables and recivables with currency options rather than forward contracts or future contracts

Q: Which of the following issues is least relevant to treasury​ management?

A: Treasury Management: It involves managing the holdings of an enterprise, with the primary purpose of…

Q: Explain the differences and similarities between Forward, Futures, and Options. Then why can there…

A: The key differences between forwards, futures, and options are as follows: 1. Forward contracts…

Q: Explain carefully how swaps allow firms and banks to separate different types of fixed income risk.…

A: An interest rate swap is a contract between two parties in which one stream of interest payments is…

Q: Why would a company prefer a foreign currency option over a forward contract in hedging a foreign…

A: Foreign currency options have an advantage over forward contracts in that the holder of the option…

Q: discuss the motives a company may have for engaging in currency and intrest rate swaps

A: A swap is a two-party derivative transaction that includes the exchange of pre-agreed cash flows. It…

Q: What are the differences in accounting for a forward contract used as a cash flow hedge of (a) a…

A: Cash flow hedge of a foreign currency denominated asset or liability: For a cash flow hedge of a…

Q: How can we measure whether short-term international capital markets are fully integrated or not?…

A: Measuring the integration of short-term international capital markets is a complex task that…

Q: Illustrate how to synthesize a forward hedging strategy by using only the money markets, in order to…

A: The idea of forward hedging is to lock-in the price (or exchange rate) today for a future foreign…

Q: Economic exposure represents the impact of exchange rate fluctuations on a firm’s future cash flows

A: The answer along with the explanation is provided below:

Q: interest rate and currency swap dealer

A: Risk confronting refers to some uncertainty or potential loss chances that will go to happen in…

Q: Which currency regime plays role of counter inflation anchor: Select one alternative: Free…

A: Solution Step (1) Inflation Anchor Conventional wisdom is that a financial organization can anchor…

Q: Would you prefer using negotiable instruments as a form of payment rather than using traditional…

A: A negotiable instrument is an archive that ensures installment of a particular measure of cash to a…

Q: a)  Why is financial leverage understood to be a fair-weather friend?

A: “Since you have asked multiple questions, we will solve the one question for you. If you want any…

Q: hedging arrangement and how does it reduce foreign currency risk exposure

A: Foreign currency risk can be defined as the risk of change in the exchange rate of a foreign…

Q: Transaction exposure:       A. measures the extent to which foreign exchange volatility may affect a…

A: Transaction exposure refers to the exposure level of loss happened from the risk involved in the…

Q: What is the difference bet

A: There are many types of traders in the market and each trader has their own objective in the market…

Q: What does the word hedging mean? Why do companies hedge foreign exchange risk?

A: What does the word hedging mean? Why do companies hedge foreign exchange risk? Answer : The term…

Q: What kind of interest rate swap would a commercial bank with a negative re-pricing gap (that is,…

A: We have to find out an appropriate kind of interest rate swap for a commercial bank with a negative…

Q: What is the difference between the concepts of surplus and trade deficit in international trade? Why…

A: International trade is necessary for any country as the resources are not in equity. Many countries…

Q: Using an example, discuss the possible effect of hedging on a firm’s tax obligations.

A: Given that these are two separate questions, we will answer the first one according to Bartleby…

Q: What types of risks are interest rate andexchange rate swaps designed to mitigate?Why might one…

A: Introduction: An interest rate swap is a form of derivative contract whereby two counterparties…

Q: What does the term "carry trade" mean? Group of answer choices Borrow in the domestic currency to…

A: Carry trade means is borrow at a low interest rate currency and convert these amount in other…

Q: Which of the following statements regarding arbitrage is the most correct? A) Any situation in…

A:

Q: How may the domestic cost of capital for a foreign venture be adjusted to account for currency rate…

A: Country risk refers to a country's economic, political, and corporate hazards, all of which may…

Q: Explain the following: Liquidity management currency issue lender of last resort financial…

A: The above terms are associated with commercial banks and the Central Bank of the country. The terms…

Q: If barriers to international securities markets are reduced, will a country’s interest rate be more…

A: The International Securities Market is an important segment of the world's financial market. When an…

Q: w can the company use currency futures contracts to hedge against exchange rate risk?

A: A future contract is an agreement to buy or sell the underlying asset on a specified future date and…

Q: What is counter party risk How does counterparty risk influence a firm's decision to trade…

A: The exchange traded derivatives are all such derivative switch will be traded on various exchange…

Q: Explain with examples how to measure exchange rate risk for long positions and short positions Notes…

A: Forex (Forex or FX) is the trading of one currency against another. For example, you can exchange US…

Q: Which of the following is negative affects the currency exchange rate bid/ask spread? A. order costs…

A: The difference arising between the prices quoted by seller and price offered by potential buyer is…

Q: How might thetreasurer of a multinational firm use the interest rate parity concept (a) when…

A: Interest rate parity is a concept in which there are different interest rates in two countries and…

Q: Explain why the following statement is true or false: “The smaller and less liquid markets and…

A: Currency market or foreign exchange market is defined as the global decentralized or OTC market…

Q: Under what conditions can companies use hedge accounting to account for a foreign currency option…

A: Hedge Accounting: Hedge accounting is a process which identifies gains or losses on hedging tools in…

Q: Write a paragraph on how MNCs could revise their bonus structure so that bonuses are not influenced…

A: Bonus structure is the structure as per which a firm distributes bonus to the employees. Bonus is…

Q: Exchange rate risk is irrelevant because investors can hedge exchange rate risk on their own.…

A: Exchange rate risk is a risk owing to fluctuations in the currency rates between the two…

Q: Which of the following is not an example of sovereign risk? a. Changes in tax rates b. Changes in…

A: Sovereign risk refers to the risk associated with investing in or lending to a foreign country,…

Q: Statement I - Exchange rate risk is a factor that contributes to the difficulty of the company to…

A: Credit Period relaxation means extending the credit period given to our customer, it is beneficial…

Q: To hedge payables, the firm will purchase a currency call option on the payable foreign currency.…

A: Hedging is done to reduce the exposure of currency risk. So suppose the company has to pay 1 million…

Q: Why might a company prefer a foreign currency option rather than a forward contract in hedging a…

A: The purchase of hedging instruments to counter the risk provided by certain foreign exchange…

Q: What are the differences in accounting for a forward contract used as (a) a cash flow hedge and (b)…

A: a.

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.