Answer to Question #184924 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?

 Based on the calculations in questions 2 and 3, do you believe that it is a good policy to hedge BusBoards’s currency exposure? Why?

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.

Based on questions 2 and 3, it is a good policy to hedge BusBoards’s currency exposure to decrease the risks.