Determining the foreign exchange risk

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1. Comment on the following statement: If you have a lot of foreign holdings scattered around the world, foreign exchange risk is not much of a problem because the various translation gains and losses all average out to zero in the long run.

2. If you anticipated receiving a sum of a foreign currency in 90 days, why not hedge this transaction by using a 30-day forward contract and replacing it twice? Would this not give you greater flexibility over locking in the 90-day rate? You manage a $25 million portfolio for a very wealthy individual. This person brings in an article from The Wall Street Journal about a foreign mutual fund and expresses interest in it. How would you go about learning more about this fund for your client?

3. At present, 1 unit of currency X equal 3 units of currency Y. interest rates are 6 percent in country X and 8 percent in country Y. Inflation in both countries suddenly rises by 3 percent. What effect would you expect this to have (a) on the respective interest rates and (b) on the relative exchange rates?

4. Investor A holds three securities; investor B holds twelve. For each investor, would the addition of an international mutual fund to the portfolio make most sense?

5. You manage a $25 million portfolio for a very wealthy individual. This person brings in the article from the Wall Street Journal about a foreign mutual fund and expresses interest in it. How would you go about learning more about this fund for your client?

6. Comment on the following statement: I've never made any money in the currency forward market.

Reference no: EM131412071

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