Which of the Following Does NOT Illustrate the Benefit of Reduced

question 30

Multiple Choice

Which of the following does NOT illustrate the benefit of reduced exchange rate variability that comes with the adoption of a single currency?

• A) An Austrian carpet retailer that had previously limited its imports of Belgian carpets because of the uncertainty of the future value of the Belgian franc now imports more Belgian carpet.
• B) A Spanish bank that had previously not had a subsidiary in Italy because of the unpredictability of the future value of the Italian lira now buys an Italian bank.
• C) A German bakery company that had previously paid its bank in order to buy French francs forward to pay for imports of French wheat no longer incurs the cost of engaging in forward foreign exchange contracts.
• D) An Italian company that had not previously imported Dutch flowers because there was little demand for them now begins to import flowers from the Netherlands and promote them heavily.

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Definitions:

Fair-Value Hedge

A hedge of the exposure to changes in fair value of an asset or liability or an unrecognized firm commitment, which could affect profit or loss.

Forward Contract

a financial agreement between two parties to buy or sell an asset at a future date for a price agreed upon today, commonly used for hedging and speculation.

Gross Method

The gross method is an accounting practice whereby discounts are not considered in the recording of purchases; discounts taken are recorded as income.

Forward Contract

A specialized agreement crafted between two parties to transact an asset at a certain price on a future agreed date.