Currency Hedging Case Study

620 Words 3 Pages
The key arguments in opposition to currency hedging such as market efficiency, agency theory, and diversification do not have financial theory at their core. False

A U.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $2.01/£ the U.S. firm will realize a ________ of ________. Loss of 2,000

Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates. Transaction, operating
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A ________ hedge allows Plains States to enjoy the benefits of a favorable change in exchange rates for their euro receivables contract while protecting the firm from unfavorable exchange rate changes. Put option

MNE cash flows may be sensitive to changes in which of the following? All of these

Refer to Instruction 10.1. If Plains States chooses not to hedge their euro receivable, the amount they receive in six months will be ________ undeterminable today

A U.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. The U.S. firm is at risk today of a loss if All

The two basic methods for the translation of foreign subsidiary financial statements are the ________ method and the ________ method current rate, temporal

Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years. Transaction, operating
Refer to Instruction 10.1. The cost of a call option to Plains States would be ________. Not enough info to answer the
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Consolidated income statement

Hedging, or reducing risk, is the same as adding value or return to the firm. False

Refer to Instruction 10.1. Plains States would be ________ by an amount equal to ________ with a forward hedge than if they had not hedged and their predicted exchange rate for 6 months had been correct. Worse off; $62,500

Translation exposure measures the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations.

Translation exposure may also be called ________ exposure. Accounting

Refer to Instruction 10.1. Money market hedges almost always return more than forward hedges because of the greater risk involved. False

________ exposure measures the change in the present value of the firm resulting from unexpected changes in exchange rates.

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