Explanation:
Costs are always a consideration. The lower the cost, the better. Forward contracts do not require up-front costs to enter, as is the case with options. Additionally, liquidity of forwards is a consideration—the more liquid, the better, in the event there is a desire to unwind the position prior to its expiration.
(Book 1, Module 2.2, LO 2.d)
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Question 50
Globalization is an economic reality for many firms. Competitive advantage is rarely thought of as being determined from local or regional perspectives, but instead, from global views. Entering foreign markets, though, requires transactions in foreign currency, which induces currency risks associated with operational and financial transaction considerations. Which of the following represents an important factor when deciding to hedge foreign currency risk?
A
Exchange rate fluctuations across currencies require costly positions.
B
Forward contracts for currency exposures exist and are highly liquid.
C
Forward contracts for currency exposures exist and are highly illiquid.
D
The price of option contracts is less than that of forwards.
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