Question

4. Forward contracts are

a. mainly provided by an organized exchange such as CME.

b. standardized in terms of quantities, currencies, delivery dates, etc.

c. exposed to a higher degree of default risk than futures contracts.

d. subject to daily resettlement by a clearinghouse.

5. Conventionally, foreign currency exposures are classified into

a. Economic exposure, transaction exposure, and translation exposure.

b. Economic exposure, accounting exposure, and political exposure.

c. National exposure, international exposure, and trade exposure.

d. Operating exposure, conversion exposure, and exchange exposure.

6. When an exporting company has accounts receivable in foreign currency, the company can eliminate its currency exposure by

a. buying currency call options.

b. buying currency put options.

c. buying currency futures.

d. buying currency forwards.

Answer 1

4)

Unlike Futures, Forward Contracts are not regulated by any body. They are custom contracts between parties. There is no daily settlement.

Therefore, (c) they are exposed to higher degree of defaultrisk than futures contract.

5)

Foreign Exchange Exposure can be classified into (a) Transaction, Translation & Economic Exposure.

Note: No further explanation required.

6)

Exporting Company has accounts receivable. Therefore, it will need to sell the foreign currency. Put Option gives a right to sell.

Therefore, (b) buying currency Put Options