Question

#1. Your firm imports components from Canada (paying in Canadian dollars), produces cars in the US, and exports those cars to Mexico (receiving Mexican pesos).

Using foreign exchange forward contracts, which of the following steps could you take to reduce your foreign exchange risk (mark all that apply)?

A. Buy Mexican peso forward against the USD.

B. Sell Mexican peso forward against the USD.

C. Buy Canadian dollars forward against the USD.

D. Sell Canadian dollars forward against the USD.

#2. Using foreign exchange options, which of the following steps could you take to reduce your foreign exchange risk (mark all that apply)?

A. Buy a put option on the Mexican peso.

B. Buy a call option on the Mexican peso.

C. Buy a put option on the Canadian dollar.

D. Buy a call option on the Canadian dollar.

Answer 1

USD has to be converted into CAD to pay in CAD

And Peso to be converted to USD

Hence, exchange risk will be reduced by:

B. Sell Mexican peso forward against the USD.

C. Buy Canadian dollars forward against the USD.

2. A. Buy a put option on the Mexican peso.

D. Buy a call option on the Canadian dollar.

As Put option is the right to sell the underling currency at a specified price on a future date

And Call option is the right to buy the underlying currency at a specified price on a future date.