Question

1. We have a 1 billion won payable in one year from now. How do we appropriately hedge ourselves against it?

2. Explain translation FE exposure. Is the possibility of a translation loss real and
under what circumstances? Differentiate between #8 and # 52.

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1. We have a 1 billion won payable in one year from now. How do we appropriately hedge ourselves against it?
Answer:
In this case, the first step is to assess whether the exchange rate movements in the future would be adverse or favorable. When the movements are expected to be favorable, a lesser amount should be hedged while if the movements are adverse, the entire 1 billion won should be hedged. The hedge ratio can be used to determine the quantity to be hedged....

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