Question $1$

How would you define transaction exposure? How is it different from economic

exposure?

Question $2$

What are the advantages of a currency options contract as a hedging tool compared

with the forward contract?

Question $3$

Should a firm hedge? Why or why not?

Question $4$

Cray Research sold a super computer to the Max Planck Institute in Germany on

credit and invoiced million payable in six months. Currently, the six$-$month

forward exchange rate is and the foreign exchange advisor for Cray

Research predicts that the spot rate is likely to be in six months.

a$)$ What is the expected gain$/$loss from the forward hedging?

b$)$ If you were the financial manager of Cray Research, would you recommend

hedging this euro receivable? Why or why not?

c$)$ Suppose the foreign exchange advisor predicts that the future spot rate will

be the same as the forward exchange rate quoted today. Would you

recommend hedging in this case? Why or why not?

d$)$ Suppose now that the future spot exchange rate is forecast to be $.$

Would you recommend hedging? Why or why not?