ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Decrease the variability of tax paid
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Decrease the spread between spot and forward market quotes
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Increase the variability of expected cash flows
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Decrease the variability of expected cash flows
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Detailed explanation-1: -Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset. The reduction in risk provided by hedging also typically results in a reduction in potential profits.
Detailed explanation-2: -Hedging with forex is a strategy used to protect one’s position in a currency pair from an adverse move. It is typically a form of short-term protection when a trader is concerned about news or an event triggering volatility in currency markets.
Detailed explanation-3: -A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset.
Detailed explanation-4: -Hedging with currency derivatives allows firms to sustain larger capital investments and also removes the sensitivity of investment to internally generated funds. Thus, it mitigates the underinvestment friction of Froot et al (1994), at a time when capital in the economy as a whole is scarce.