Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. assume that john own a company with fx exposure, h

Assume that John own a company with fx exposure, how John using forward contract to hedge...

80.2K

Verified Solution

Question

Finance

Assume that John own a company with fx exposure, how John usingforward contract to hedge the foreign exchange rate risk.Illustrate it with a scenario.

Answer & Explanation Solved by verified expert
4.2 Ratings (667 Votes)
Risk is a probability of unfavorable outcome An entrepreneur has to safeguard its business against multiple risks in todays environment to be competitive and efficient Risks are many and numerous Its nearly impossible to anticipate all the risks measure them and mitigate them However we can understand them and take an informed call or decision to mitigate them or get rid of them or to go ahead with them Hedging refers to taking offsetting position in two separate but related financial instruments such that the impact of the risk factor is mitigated or eliminated A very simple example is Say a company completes a delivery today but payment will be received in a foreign currency a month later but based on exchange rate today A company should immediately hedge this position by entering into a transaction where payment by it has to be made in the same foreign currency a month later but based on exchange rate today If this happens the company receives payments in the foreign currency a month later and pays out the same amount in the second transaction thus without incurring any gains losses due to exchange rate fluctuation Hedging can be natural or intellectual man made An artificial hedge is by taking the offsetting position in derivative market by making use of options futures forwards or even swaps Hedging can be used to manage risks arising due to fluctuations in prices interest rate or foreign exchange rates Commonly used instruments are future contracts options Call and Put option on the stock of two    See Answer
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Q

What are “natural” ways of coping with the pain of childbirth? Is childbirth at home safe?

Psychology
Q

A food web fox A B rabbit 89 3J owl 8 93J mouse hawk frog...

Biology
Q

It has been observed that velocity of longitudinal and transverse mechanical waves in this earth...

Physics
Q

12 Solve for x 17x 23 BREKENINGE 81 74

Geometry
Q

What is P heads or tails Simplify your answer and write it as a fraction...

Geometry
Q

You want to have a 95 000 college fund in 10 years How much will...

Basic Math
Q

Find the eigenvalues and eigenvectors of the following matrices using both eig and power metho...

Algebra
Q

4 Evaluate x 4 x 2 for x 5

Algebra
Q

Find the exact value of the logarithm without using a calculator log 12144

Algebra
Q

Morning Sky, Inc. (MSI), manufactures and sells computer games. The company has several product lines...

Accounting
Q

Song earns $165,000 taxable income as an interior designer and is taxed at an average...

Accounting
Q

Pretend I am a friend who wants to know something about the financials of Tesla...

Accounting