Question

1.A) Which of the following is the most likely strategy for a U.S. firm that will be paying off loans dominated in Japanese Yen in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?

purchase a call option on Japanese Yen.

sell a futures contract on Japanese Yen.

obtain a forward contract to sell Japanese Yen forward.

all of the above are appropriate strategies for the scenario described.

1.B ) If your firm expects the euro to substantially depreciate due to European debt crisis, it could speculate by _______ euro put options or _______ euros forward in the forward exchange market.

Selling, Selling

Selling, Purchase

Purchasing, Purchasing

Purchasing, Selling

Answer 1

ANSWER

1.A )

$\rightarrow$ CORRECT OPTION $\rightarrow$ Option (a) $\rightarrow$ purchase a call option on Japanese Yen

$\rightarrow$ EXPLANATION

• US Firm is having loans payables denominated in Japanese Yen which means that it will need Japanese Yen in future so that it can pay back its loan
• It means that Firm will be worried that Japanese Yen might go up due to which it will cost more.
• So to eliminate that risk, US Firm can fixed a certain price for buying yen at a future date bu buying call options.

1.B )

$\rightarrow$ CORRECT OPTION $\rightarrow$ Option (d) $\rightarrow$ Purchasing , Selling

$\rightarrow$ EXPLANATION

• Since firm is expecting a depreciation in Euro in future, it can speculate by buying a Put Option which means that it will sell Euro at a pre-determined rate known as Strike Price despite the fall in euro rate.
• And also it can enter into Sell Contract in Forward Market which means that it can Sell Euro at a fixed forward rate despite fall in euro rate .