Question

1. Assume that the transactions listed in the first column of the table below are anticipated by U.S. firms that have no other foreign transactions. Place an “X” in the table wherever you see possible ways to hedge the transaction exposure.

	Forward Contract		Futures Contract		Options Contract
	Long	Short	Long	Short	Call	Put
a. A Inc. plans to sell goods to Portugal, denominated in euro
b. B Co. will import automobiles from Germany, denominated in euro
c. C Corp has a subsidiary in Netherlands that will be remitting funds to the U.S. parent
d. D Inc needs to pay off existing loans that are denominated in Australian Dollars
e. E Ltd is bidding for a contract and E will receive initiation money denominated in euro only if they win the bid

Answer 1

a. As 'A' sold goods to Portugal and gointto receive payment in Euro so we are going to receive euro end we need to convert it into Dollars we will take short forward contract to sell euro into the future.

b. Here we need to pay in Euro in future so we will take long forward contract so we have contract to buy euro Euro I'm future so we can pay amount at pre-determine rate.

c. here again we are going to receive Amount in Foriegn Currency so we will take short forward contract to sell those Currency.

d. Here again we need to pay in Australian Dollar so we need to Purchase AUD so we will take long forward contract.

e. So here as it is not certain that wether we will receive payment in euro or not so we will not take forward contract here because it arouses obligation in future so we will take long put Option to sell euro in future if we doesn't win a bid still we are allowed to not sell the Euro's as we were entered in option contract.