FIL241-Chapter 12 Exam Questions and correct answers 2022

FIL241-Chapter 12 Exam Questions and correct answers 2022What does the theory of comparative advantage say? What are its implications? The world can be richer if people (companies, countries) specialize in producing products or services based on their comparative advantage (where they can maximize their wealth- assuming no use of force of fraud). Can exchange rates between two developed country currencies be volatile? Yes How are exchange rates determined? Demand and supply (sometimes by regulations). What is the purchasing power parity? What is it important? The prices of the same product in two countries should be about the same when expressed in the same currency. Exchange rate risk for business is not as high as the volatility of exchange rates implies; devaluation of one currency tends to be followed by price increases in that currency. How did exchange rate risk change through time? Increased as we moved away from using gold, silver, and paper money backed by gold and silver as currencies. What are the main issues to consider when hedging? Estimate net cash flows. Do not hedge all risk. Consider over-hedging problems. How can we hedge? Use futures or forward contracts, money market transactions, and options.