One of the Drawbacks of Using Forward Contracts to Hedge

question 57

Multiple Choice

One of the drawbacks of using forward contracts to hedge foreign-exchange risk is that the:

• A)transaction costs in the forward market are high.
• B)forward rates are always lower than spot rates.
• C)hedged currency could appreciate during the period.
• D)hedged currency could depreciate during the period.

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Definitions:

Form 10-K

An annual report required by the U.S. Securities and Exchange Commission (SEC), providing a comprehensive overview of a company's performance.

Contributed Capital

Also known as paid-in capital, it represents the total value of all assets contributed to a company by its shareholders in exchange for shares of stock.

Treasury Stock

Shares of a company's own stock that it has reacquired from shareholders but not retired, held as an asset on the balance sheet.

Premium

The amount by which the price of a financial instrument or asset exceeds its par or face value; also refers to the cost paid for an insurance policy.