Question: Question 1 a. With a close reference to the recent movements in Pound/Dollar spot exchange rate, critically discuss main causes of exchange rate volatility in

Question 1

a. With a close reference to the recent movements in Pound/Dollar spot exchange rate, critically discuss main causes of exchange rate volatility in the foreign exchange markets.

b. How might exchange rate volatility impact international trade? (Use relevant financial data and charts to illustrate your answer).

Question 2

a. Explain the nature of potential risks in international transactions and critically discuss how international traders might manage such risks via the derivative markets.

b. Critically examine why a firm should consider hedging net payables or net receivables with currency options rather than: (i) forward contracts, and (ii) future contracts.

c. What are the advantages or the disadvantages of hedging with currency options as opposed to future contracts in international financial transactions? (Give examples and use relevant financial charts to illustrate your answer).

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