Question 42 - why does Peterson face exchange rate risk? Is it because the revenues of the firm can vary every quarter? They are committed to delivering the $6,483,683 every quarter? Also, in such a swap, is the interest rate updated every quarter or it remains fixed till the end of the swap?
It is because of one word “average” Revenues “average” 5 million. Therefore they can be higher or lower, in which case the hedge is not enough or too much.
markCFAIL Wrote: ------------------------------------------------------- > It is because of one word “average” > > Revenues “average” 5 million. Therefore they can > be higher or lower, in which case the hedge is not > enough or too much. Always exchange rate risk when entering into long term Forex contracts. Risk is that the amount you are hedging becomes variable or you have cash flow problems that you need to buy spot at a disadvantageous price.
What about the interest rate for the two currencies - do they remain fixed or adjusted during the swap based on market rate changes?
the rates are the libor/euribor applicable at that time.