A Company Enters into a Futures Contract with the Intent

question 57

Multiple Choice

A company enters into a futures contract with the intent of hedging an account payable of DM400,000 due on December 31. The contract requires that if the U.S. dollar value of DM400,000 is greater than $200,000 on December 31, the company will be required to pay the difference. Alternatively, if the U.S. dollar value is less than $200,000, the company will receive 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 payable.
• B) The futures contract is a contract to buy Deutsche marks at a fixed price.
• C) The futures contract is a contract to sell Deutsche marks at a fixed price.
• D) The contract obligates the company to pay if the value of the U.S. dollar increases.

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