Assume Zero Transaction Costs

question 8

Multiple Choice

Assume zero transaction costs.  If the 180day forward rate is an accurate estimate of the spot rate 180 days from now,then the real cost of hedging receivables will be:

• A) positive.
• B) negative.
• C) positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
• D) zero.

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Definitions:

Time Constant

The amount of time required for the current flow through an inductor or for the voltage applied to a capacitor to reach 63.2% of its total value.

Induced Voltage

Voltage generated in a conductor or coil due to a change in magnetic flux, according to Faraday's law of electromagnetic induction.

Eddy Current

Circular induced current contrary to the main currents. Eddy currents are a source of heat and power loss in magnetically operated devices.

Hysteresis

The phenomenon in which the state of a material lags behind changes in the effect causing it, such as the lagging of magnetic flux density behind the magnetizing force.