SECTION 3.3 SECTION 3.3
1.) Is Bazlamit's statement on the type of currency risk faced by Viewmont Corporation and
the proposed hedge most likely correct?
A.
No, she is incorrect with regard to the type of forward contract.
B.
No, she is incorrect about the type of currency risk.
C.
Yes
Answer = B
Since the fear is that the U.S. dollar will weaken against the Brazilian real, the
appropriate hedge is to enter into a long forward contract to lock in the purchase price
of the real. She is correct in this regard. But Bazlamit is incorrect about the type of
currency risk. The currency risk faced here is best described as transaction exposure, not
translation exposure.
“Risk Management Applications of Forward and Futures Strategies,” by Don M. Chance
Sections 5, 5.1, and 5.2