Managing Foreign Currency Risk

What is the main purpose of hedging in international trade?

• To eliminate all risks
• To increase profits
• To minimise the impact of currency fluctuations
• To avoid paying taxes

Which financial instrument allows businesses to lock in a specific exchange rate for a future date?

• Currency Swap
• Currency Option
• Forward Contract
• Interest Rate Swap

What is an example of a forward contract?

• Buying flour in Italy at today's rate
• Selling goods in US Dollars
• Buying Euros at a fixed rate in 3 months
• Exchanging principal amounts

What does a currency option provide to the buyer?

• The obligation to buy a currency
• The right, but not the obligation, to buy or sell a currency
• A fixed exchange rate
• A guaranteed profit

What type of businesses benefit from currency swaps?

• Businesses with short-term foreign currency obligations
• Businesses with long-term foreign currency obligations
• Businesses that do not trade internationally
• Businesses that only trade domestically

How do banks help businesses hedge their currency risk?

• By providing loans
• By offering financial instruments
• By increasing exchange rates
• By reducing taxes

Which of the following is NOT a benefit of hedging for businesses?

• Reduced risk
• Improved financial planning
• Increased competitiveness
• Immediate profit increase

What happens if the Euro gets stronger against the Pound for a business buying flour from Italy?

• The cost in Pounds decreases
• The cost in Euros decreases
• The cost in Pounds remains the same
• The cost in Pounds increases

What can a US exporter to Japan do if the Yen weakens significantly?

• Buy more Yen
• Exercise a put option to sell their Yen at a higher strike price
• Ignore the exchange rate
• Increase their product prices

How do forward contracts help businesses?

• By providing loans
• By ensuring stable input costs
• By increasing exchange rates
• By reducing the need for financial planning