Question

1. A British firm and a U.S. Corporation each wish to enter into a currency swap hedging agreement. The British firm is receiving U.S. dollars from sales in the U.S. but wants pounds. The U.S. firm is receiving pounds from sales in Britain but wants dollars. Which of the following choices would best satisfy the desires of the firms?

   		The British firm pays dollars to a swap dealer and receives pounds from the dealer. The U.S. firm pays pounds to the swap dealer and receives dollars.
   		The U.S. firm pays dollars to a swap dealer and receives pounds from the dealer. The British firm pays pounds to the swap dealer and receives dollars.
   		The British firm pays pounds to a swap dealer and receives pounds from the dealer. The U.S. firm pays dollars to the swap dealer and receives dollars.
   		The British firm pays dollars to a swap dealer and receives dollars from the dealer. The U.S. firm pays pounds to the swap dealer and receives pounds.

2) Recently the British Pound suffered an unexpected depreciation in value. Which of the following actions being considered by Coventry Furniture of London, a purely domestic furniture manufacturer and retailer, would be considered a highly unlikely response to the depreciation of the pound?

		Coventry might choose to maintain its domestic sales prices constant in pound terms.
		Coventry might try to raise domestic prices because competing imports are now priced higher in England.
		Coventry might try to lower domestic prices because competing imports are now priced higher in England.
		none of the above

Answer 1

1. Option A. The British firm pays dollars to a swap dealer and receives pounds from the dealer. The U.S. firm pays pounds to the swap dealer and receives dollars.

The British firm wants pounds so it goes Swap dealer and gives its US dollar and get pounds and the US firm will follow the same approach to get US dollar out of pounds.

2. Option D none of the above

As the company is operating domestically the currency fluctuation will make the company to choose appropriate price based on the market prices so the above given options are all valid.