Question

QUESTION 5 Select all that are true regarding investors and fx Currency forwards and futures can be used to mitigate fx risk for a foreign investment's "return trip" Currency swaps of two future dated exchanges can be used to make a foreign investment today Currency options can be used to hedge the risks of repatriating foreign investment returns. A properly hedged foreign investments will always have a higher total return than an uncovered foreign investment QUESTION 6 Select all that are true regarding currency (monetary) unions: Currency union members use fiscal policy to regulate the business cycle since sovereignty over monetary policy is lost to the union Currency unions require a common monetary policy in order to keep the exchange rate pegged between members Since each member of a currency union might be at a different point in the business cycle, the use of fiscal policy is not a concern to the union as a whole Currency unions form to facilitate factor mobility, intermediate good exchange, and trade between members

Answer 1

Ans5 : The true selection regarding investor and forex(fx) is as follows:

1. Currency forwards and futures can be used to mitigate forex risk for a foreign investment return trip. (It help in mitigating the risk associated with the fluctuation of other countries currency value due to the change in international as well as the destination country investment factor.)
2. Currency Option can be used to hedge the risk of repatriating foreign investment returns.(When a amount is being invested in another country then there is a stream of investment returns and the risk on the same can be reduced by entering into a currency option of future or forward contract)
3. A properly hedged foreign investment will always have a higher total return than a uncovered foreign investment.(As the risk of the future income is reduced with the help of currency option.)

Ans 6 : The following options are true regarding Currency(Monetry)Unions :

1. Currency unions require a common monetary policy in order to keep the exchange rate pegged between members. (As they have their macroeconomics parameter similar in nature like inflation rate,economic growth ,fiscal deficit etc helping them to adopt a common monetary policy to enhance the trade and productivity of the resources with them.)
2. Currency Union form to facilitate factor mobility,intermediate good exchange, and trade between members.(As the reason for turning up to a common platform of using a common currency is to enhance the trade and mobility of resources and grow at a faster pace as compare to being a individual country for example European Union)