Explain the difference between foreign currency options and futures and when either might be most appropriately used.
Answer to relevant QuestionsThe value of an option is stated to be the sum of its intrinsic value and its time value. Explain what is meant by these terms. How does organized exchange trading in swaps remove any risk that the counterparty in a swap agreement will not complete the agreement? Why would anyone write an option, knowing that the gain from receiving the option premium is fixed, but the loss, if the underlying price goes in the wrong direction, can be extremely large? What is meant by the term “fundamental equilibrium path” for a currency value? What is “noise”? Many MNEs have established transaction exposure risk management policies that mandate proportional hedging. Explain and give an example of how proportional hedging can be implemented.
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