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.

Understand the principles and legal consequences of deceptive practices and advertising regulations.

Grasp the significance of specific acts such as the Magnuson-Moss Act, Dodd-Frank Act, and Gramm-Leach-Bliley Act in consumer law.

Recognize the impact of internet and financial regulations on consumer protection.

Understand the enforcement mechanisms and remedies available under various consumer protection statutes.

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Definitions:

Free-Trade Agreement

A pact between two or more nations to reduce barriers to imports and exports among them, with the aim of encouraging trade and economic integration.

Publicly Accountable Enterprises

Businesses that have accountability to a broad group of stakeholders, including shareholders and the public, typically required to follow specific accounting standards.

Debt Issuer

An entity, like a corporation or government, that issues debt instruments such as bonds to raise capital by borrowing from investors.

Banks

Financial institutions licensed to receive deposits and make loans, offer various other financial services.