1.Identify the one true statement about currency forward contracts in the absence of bid-ask spreads:

a.If you believe that the spot rate in 3 months will be larger than todays 3-month forward rate, you should then sell forward.

b,Extreme bind hedging, which is hedging the present value of all future FC cashflows, carries very little risk.

c.A combination of forward contracts with the same maturity and different inception allows us to speculate on the value of forward contracts.

d.The best way to hedge against FC cashflows is to simply avoid FC cashflows and invoice always in HC. There is no economic loss from doing this.

e.None of the suggested answers.

2.The short position in a forward contract can be replicated by: a. selling a put and buying a call. b. selling a foreign T-bill and buying a domestic T-bill. c. buying a put and selling a call.

d. bothbandc e. all of the above

3.In the context of currency risk and exposure, which of the statements below is true? a. Operating exposure is the exposure that results when the forward rate is at a discount with respect to the spot rate at the moment you sign a sales or purchase

contract. b. Exchange risk describes how volatile a firms cash flows are with respect to a

particular exchange rate. c. Exchange exposure is a measure of the sensitivity of a firms cash flows to a change

in the spot exchange rate. d. Options are undoubtedly the best choice for hedging foreign currency exposure

because the possibility of profiting from a favourable change in the exchange rate remains open without the losses from an unfavourable change in the exchange rate.

e. Operating exposure is the exposure that results when the forward rate is at a premium with respect to the spot rate at the moment you sign a sales or purchase contract.

Please answer Question 1-3.