- Using an example, discuss the possible effect of hedging on a firm’s tax obligations.
Answer: One can use an example similar to the one presented in the chapter.
- Explain contingent exposure and discuss the advantages of using currency options to manage this type of currency exposure.
Answer: Companies may encounter a situation where they may or may not face currency exposure. In this situation, companies need options, not obligations, to buy or sell a given amount of foreign exchange they may or may not receive or have to pay. If companies either hedge using forward contracts or do not hedge at all, they may face definite currency exposure.
- Explain cross-hedging and discuss the factors determining its effectiveness.
Answer: Cross-hedging involves hedging a position in one asset by taking a position in another asset. The effectiveness of cross-hedging would depend on the strength and stability of the relationship between the two assets.
