A Company Enters into a Futures Contract with the Intent

question 21

Multiple Choice

A company enters into a futures contract with the intent of hedging an expected purchase of some equipment from a German company for DM400,000 on December 31. The contract requires that if the U.S. dollar value of DM800,000 is greater than $400,000 on December 31, the company will receive the difference. Alternatively, if the U.S. dollar value is less than $400,000, the company will pay the difference. Which of the following statements is correct regarding this contract?

• A) The Deutsche mark futures contract effectively hedges against the effect of exchange rate changes on the U.S. dollar value of the Deutsche mark commitment.
• B) The futures contract exceeds the amount of the commitment and thus hedges movements in the Deutsche mark exchange rate.
• C) The futures contract is a contract to sell Deutsche marks at a fixed price.
• D) The extra DM400,000 would be accounted for as a speculative investment.

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Definitions:

Main Box Ratio

Refers to the primary gear ratio in the gearbox of a vehicle, determining the relationship between engine speed and wheel speed, affecting acceleration and fuel efficiency.

Range Shift Condition

A specific state in a multi-speed transmission that allows the driver to switch between different sets of gear ratios or ranges for optimal performance.

Slave Valve Piston

A component within a hydraulic or pneumatic system that moves in response to the pressure changes transmitted by the master cylinder or valve.

Auxiliary Section

A supplementary section or division in a document or machine that supports the main part or function.