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This is on hedging and speculation. 1. If you have a foreign amount receivable, how would...

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Finance

This is on hedging and speculation.

1. If you have a foreign amount receivable, how would you hedgewith options? What is the intuition behind this approach?

2. If you have a foreign amount payable, how would you hedgewith options? What is the intuition behind this approach?

3. How would you hedge foreign receivables/payables with aforward contract?

4. What is the difference between hedging and speculation? Inother words, what is the goal of hedging versus speculating?

Answer & Explanation Solved by verified expert
4.5 Ratings (708 Votes)
There are two kinds of risk here currency risk and receivable risk Foreign exchange risk can arise either due to transaction exposure ie due to receivables expected or payments due in foreign currency Investors can hedge against foreign currency risk by purchasing a    See Answer
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Transcribed Image Text

This is on hedging and speculation.1. If you have a foreign amount receivable, how would you hedgewith options? What is the intuition behind this approach?2. If you have a foreign amount payable, how would you hedgewith options? What is the intuition behind this approach?3. How would you hedge foreign receivables/payables with aforward contract?4. What is the difference between hedging and speculation? Inother words, what is the goal of hedging versus speculating?

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