Answer the following statements true (T) or false (F)
1. In general, world currencies are not important with respect to international business.
2. The functional currency is the currency the firm uses in a foreign country.
3. A forward contract is an option.
4. Futures contracts can perform the same function as a forward contract.
5. Options contracts differ from forward and future contracts as the investor does not have to buy or sell the underlying asset at a future point in time.
1.False – One of the most significant problems encountered when doing business internationally is the impact of foreign exchange rates. The world’s currencies fluctuate in value every minute of every day.
2.False – The “natural” or functional currency. This is the currency that the firm is doing business in on a day-to-day basis.
3.False – A forward contract is not an option. Both the buyer and the seller are obligated to perform under the terms of the contract. However, because forwards are private agreements, they carry the risk of the counter party not fulfilling its obligation.
4.True – They allow a party to buy or sell a currency at a predetermined price and date. However, the difference between a forward contract and a futures contract is that futures contracts are standardized, meaning they can only be entered at preset amounts and for predetermined settlement dates. On the other hand, forward contracts are entirely tailor made. Standardization allows futures contracts to trade on exchanges and allows for the contract to be closed out or sold to a third party.
5.True – Options contracts are not like forward contracts or futures contracts. If an investor buys an option, he or she does not have the obligation to either buy or sell a currency at a future point in time. Only the seller of an option can be made to buy or sell at some point in the future. Options give the owner of the “option” the right, but not the obligation, to buy or sell a futures contract on a currency at a predetermined price and by a certain date in the future
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