Chapter 5 Flashcards
What is a currency derivative?
A contract whose value is derived from the value of an underlying currency, such as forwards, futures, and options
How do forward contracts help MNCs hedge against exchange rate risk?
Forward contracts lock in an exchange rate for a future date, protecting MNCs from unfavorable currency movements
What is a forward premium or discount? Add formula
A forward premium occurs when the forward rate is higher than the spot rate, while a forward discount occurs when the forward rate is lower than the spot rate
How are currency futures different from forward contracts?
Currency futures are standardized contracts traded on exchanges, while forward contracts are tailored to the needs of the parties involved and are traded over-the-counter
What is a currency call option?
A contract that gives the buyer the right to purchase a specific currency at a predetermined price before or on a specific date
How can MNCs use currency call options to hedge payables?
MNCs purchase call options to lock in the maximum price they will pay for foreign currency in the future, hedging against currency appreciation.
What is a currency put option?
A contract that gives the buyer the right to sell a specific currency at a predetermined price before or on a specific date
How do currency put options help MNCs hedge receivables?
MNCs purchase put options to ensure they can sell foreign currency at a favorable rate, protecting against currency depreciation.
What is the “carry trade” in currency speculation?
A strategy where investors borrow in a currency with low interest rates and invest in a currency with higher interest rates, aiming to profit from the interest rate differential
How do speculators use currency futures to profit from expected exchange rate movements?
Speculators buy or sell currency futures based on their expectations of currency appreciation or depreciation, aiming to profit from changes in the futures price
Nondeliverable Forward Contracts
