Question

1. Imagine that you are faced with three hedging problems: A) You are a community bank making mortgages; B) You are an importer of French wines; and, C) You are an exporter to Japan. What is your cash position? The risk you face? And the hedge you will put on in the futures market?

Answer 1

Hedging is an offshore investment fund, which can be formed due to the private limited partnership, which can engage the speculation that can use the credit or borrowed capital.

A) You are a community bank making mortgages;

The community bank making mortgages would have the cash position limited to the funding and hedging and gaining out of it. The risk faced is falling foreign currency value. The future market would be dependent on the devaluation or the appreciation of the currency.

B) You are an importer of French wines; and,

If the importer of the French wines, the wines would be purchased if there is foreign currency is cheap and the domestic currency is high. The risk faced is the high cost if there is a home domestic currency to be high which would lead to more cost. The hedge if invested more in the foreign currency with the expensive domestic currency leading to the high cost.

C) You are an exporter to Japan

If exporter to Japan, then it would lead to the expensive foreign currency which would be purchased by the Japanese people, then more exports would be earned. The risk is the lowering of the Japanese currency and the hedging would be more selling of wine in the lower devalued Japan currency. It would be compared to the domestic currency.