M5-Financial Risk Management: Part 2

Question 1

As a foreign competitor’s currency becomes weaker compared with the US dollar, the product becomes less expensive in US dollars. The less expensive product will increase demand and result in an advantage in the US market. (true or false)

Answer 1

true

Question 2

To fix a price in dollars to buy British pounds, British pound call options should be purchased. Call options would allow, but not require, the purchaser of the call to acquire the currency (British pounds) for a specified time in the future. If the price goes up, the purchaser (the importer) would exercise the options; if not the purchaser (importer) would buy the British pounds in the market and let the options expire. (true or false)

Answer 2

true

Buying British pound PUT OPTIONS would allow, but not require, the purchaser of the put to sell the currency for a specified price at a specified time in the future. Since the importer needs British pounds, buying put options would not work. The importer needs to end up with British pounds.

Question 3

Inflation in a foreign currency reduces the purchasing power of the foreign currency, which means that there is less demand for the foreign currency and more demand for the domestic currency, which has higher purchasing power due to lower inflation. (true or false)

Answer 3

true