An Example of Hedging to Control Currency Exchange Rate Risk

question 2

Multiple Choice

An example of hedging to control currency exchange rate risk is a wine distributor ____.

• A) currently importing wine made from the 2010 vintage
• B) paying for wine today that will be delivered in three years
• C) that visits the vineyard where wine is made before buying the vintage
• D) that settles all of its bills with euros

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Definitions:

Insurance and Taxes

Mandatory expenses that include payments for risk coverage policies and contributions to state and federal governmental bodies.

Restocking Costs

Expenses associated with replenishing inventory, including purchase, delivery, and storage costs.

Opportunity Cost

The cost of foregoing the next best alternative when a decision is made to choose one option over others.

Credit Commitment

An agreement by a lender to extend a specified amount of credit to a borrower under certain terms and conditions.