Answer to Question #184923 in Economics for Puja

Question

2.      Assume that the Scenario 2 (Pandemic) took place in 2020 and the Canadian dollar became a safe haven currency during the pandemic. What are your cash flows (profits) if you

a)      do not hedge the exchange rate risk?

b)     hedge the exchange rate risk using forward contracts?

c)      hedge the exchange rate risk using option contracts?

 

3.      Assume that the Scenario 2 (Pandemic) took place in 2020 and the U.S. dollar became a safe haven currency during the pandemic. What are your cash flows (profits) if you

a)      do not hedge the exchange rate risk?

b)     hedge the exchange rate risk using forward contracts?

c)      hedge the exchange rate risk using contracts?

Answer 1

2. Your cash flows (profits) will:

a) decrease if you do not hedge the exchange rate risk,

b) increase if you hedge the exchange rate risk using forward contracts,

c) increase if you hedge the exchange rate risk using option contracts.

3. Your cash flows (profits) will:

a) decrease if you do not hedge the exchange rate risk,

b) increase if you hedge the exchange rate risk using forward contracts,

c) increase if you hedge the exchange rate risk using option contracts.