Question

A.

A Japanese importer has a $1,250,000 payable due in one year. Spot exchange rates are $1 per ¥100, 1-year forward rates are $1 per ¥120. The contract size is ¥12,500,000. Which strategy can hedge his exchange rate risk?

Group of answer choices

Go long in dollar forward contracts.

Go short in dollar forward contracts.

Go long in yen forward contracts.

none of the options

B.

A counterparty may use a currency swap

Group of answer choices

to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure.

to hedge and to speculate.

to play in the futures and forward markets.

to hedge and to speculate, as well as to play in the futures and forward markets.

C.

An importer’s financial market hedging alternatives don’t include which of the following:

Group of answer choices

Use currency swaps to acquire financial liabilities in the foreign currency.

Buy the foreign currency with long-dated forward contracts.

Use a rolling hedge to repeatedly buy the foreign currency.

Enter into a call option on the foreign currency.

D.

Which of the following is NOT a reason for home bias in international portfolio management?

Group of answer choices

Diversification away from systematic risk

Market frictions

Unequal access to information

Hedging domestic liabilities

Answer 1

A) Ans : Go long in dollar forward contracts.

here japanese firm being an importer faces risk that the foreign currency might get appreciated. if this happens than it will have to pay more units of home currency to buy one unit of foreign currency. Thus to mitigate this risk importer can buy forward contract or call option on foreign currency or can short home currency

Here US dollar is foreign currency hence it should go long in dollar forward contract

B) Ans : to obtain debt financing in the swapped currency at an interest cost reduction brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposure

Currency swap is used by the firms who wants interest cost reduction through comparative advantages each counterparty has in it's national capital market

C) Ans : Use currency swaps to acquire financial liabilities in the foreign currency

Importer already has to pay in future, hence acquring liabilities will not help the importer to reduce it's risk, instead it should crease financial asset in foreign currency

D) Ans : Diversification away from systematic risk

Home bias is tendency of investor to invest more in domestic market letting go benefits of diversification.

Thus Diversification away from systematic risk is not a reason for home bias