Hedging translation exposure


Problem 1: Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

  • $10,003.
  • $12,063.
  • $14,441.
  • $16,393.
  • $18,219.

Problem 2: With regard to hedging translation exposure, translation losses _______; and gains on forward contracts used to hedge translation exposure _______.

  • are not tax deductible; are taxed
  • are tax deductible; are taxed
  • are not tax deductible; are not taxed
  • are tax deductible; are not taxed

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Finance Basics: Hedging translation exposure
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