Question

An investment exposed to exchange-rate risk is a(n) international investment. a. hedged b. uncovered C. arbitrage d. covered

Answer 1

An investment exposed to exchange-rate risk is an "uncovered" international investment.

Step-by-step explanation:

An uncovered international investment is one where the investor does not use any hedging strategies to manage or mitigate the exchange-rate risk associated with the investment. In other words, the investor is fully exposed to fluctuations in exchange rates, which can impact the return on the investment.

In contrast, a "hedged" international investment involves the use of hedging strategies, such as currency forwards or options, to manage or mitigate the exchange-rate risk associated with the investment. This can help to protect the investor from potential losses due to fluctuations in exchange rates.

"Arbitrage" refers to the practice of buying and selling assets in different markets to take advantage of price differences.

A "covered" international investment is a type of hedged investment where the investor uses a forward contract or other hedging instrument to lock in a specific exchange rate for a future transaction. This helps to protect the investor from fluctuations in exchange rates between the time the transaction is agreed upon and the time it is executed.

Answer 2

b. Uncovered

Step-by-step explanation:

An investment exposed to exchange-rate risk is an uncovered international investment (option b). When an investment is "uncovered," it means that there is no protection or hedging strategy in place to mitigate the potential impact of changes in exchange rates. Exchange-rate risk refers to the possibility that the value of an investment can be affected by fluctuations in the exchange rate between currencies. Let's say you invest in a foreign stock or bond denominated in a currency other than your own. If the value of that currency depreciates against your home currency, the investment's returns would decrease when converted back into your home currency. On the other hand, if the currency appreciates, you would gain more when converting the investment's returns back into your home currency. For example, let's say you are a US investor who purchases shares in a Japanese company. If the Japanese yen weakens against the US dollar, the value of your investment in US dollars would decrease. Conversely, if the yen strengthens against the dollar, the value of your investment in US dollars would increase. In an uncovered international investment, you do not take any measures to protect yourself from these exchange-rate fluctuations. This means that any gains or losses resulting from the changes in exchange rates will directly impact the value of your investment. To hedge against exchange-rate risk (option a), you would take actions such as entering into forward contracts or using currency options to protect the value of your investment from currency fluctuations. Arbitrage (option c) refers to taking advantage of price differences in different markets to make a risk-free profit. It is not directly related to exchange-rate risk. A covered international investment (option d) refers to an investment where measures are taken to protect against exchange-rate risk. This can include using financial instruments like forward contracts or options to minimize potential losses due to currency fluctuations. In summary, an investment exposed to exchange-rate risk is an uncovered international investment (option b) because it lacks protection or hedging strategies against currency fluctuations.