You Have Decided to Hedge Your Exchange-Rate Risk in Your

question 17

Multiple Choice

You have decided to hedge your exchange-rate risk in your U.S.-based firm by contracting forward to buy 500,000 Swiss Francs for delivery in one year.The current exchange rate is Sf1.6/$.The forward rate is Sf1.7/$(U.S.) .How much better (worse) off are you if you don't buy the forward contract and instead pay the spot rate in one year if it turns out to be Sf1.65/$?

• A)($14,245)
• B)($8,912)
• C)$8,912
• D)$27,472

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Definitions:

Nonsystematic Variance

The portion of an investment's total variance that is specific to the investment itself, not related to the overall market movements, and can be reduced by diversification.

Market Index

A statistical measure that represents the value of a section of the stock market, compiled from the prices of selected stocks to gauge market trends or portfolio performance.

Active Portfolio

An investment portfolio that is actively managed with the goal of achieving returns that outperform a specific benchmark or market index.

Distressed Firms

Companies experiencing financial difficulties, often facing bankruptcy or restructuring.