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 Exchange Rate Risk & Hedging Techniques 20 Flashcards |
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Exchange rate risk refers to the potential for financial losses due to ___ in currency exchange rates. |
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Fluctuations |
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True or False: To completely eliminate exchange rate risk, one must avoid all international investments. |
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True |
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What is a key advantage of using hedged exchange-traded funds (ETFs) in managing currency risk? |
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They provide an efficient way to manage currency risk compared to individual hedging efforts. |
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Currency forwards allow investors to ___ exchange rates for future transactions. |
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Lock in |
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True or False: A strong local currency is advantageous for foreign investors as it enhances their returns on local assets. |
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False: A strong local currency is advantageous for U.S. investors, as it diminishes returns on overseas assets. |
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What is one direct hedging method that can be used to mitigate exchange rate risk? |
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Currency options, which give the right to buy or sell a currency at a predetermined price. |
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Fill in the blank: Hedging strategies help investors protect themselves from potential losses due to ___ fluctuations. |
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Market |
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What type of contract is standardized and traded on exchanges, allowing for hedging of asset prices? |
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Futures contracts |
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True or False: Investing in a diversified portfolio can help limit potential losses in the market. |
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True |
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What are the three main types of hedging contracts? |
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Forward contracts, futures contracts, and money market instruments. |
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