Reference no: EM131767150

1. You are the treasurer of a U.S. company that holds open positions (working balances or accounts payable) in foreign currencies. Your bank levies a small but appreciable charge for hedging these positions in the forward market. If you believe the foreign exchange market is efficient, and your country is neutral about risks, will you hedge? What if your company is risk averse? What if your company also has obligations in foreign currencies (bills for imported inputs or employee wages at foreign subsidiaries)? What if you think that the market sometimes is a poor forecaster of future exchange rates?

2. If the dollar is selling at a forward discount of 4 percent per annum and you think the dollar is going to depreciate at 2 percent over the next year, should you "go long" in the dollars, or "sell the dollar short"? (Assume you are risk neutral).