Assume Zero Transaction Costs

question 30

Multiple Choice

Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables 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:

Book Value

A financial metric that represents the net asset value of a company, calculated by subtracting total liabilities from total assets.

Shareholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, representing the owners' share.

Net Working Capital

The contrast between a corporation's short-term assets and its short-term debts, indicating its immediate financial health.

Non-Eligible Dividends

Dividends that are paid out by companies from earnings that have not been taxed at the corporate level and are subject to different tax treatment at the receiver's end compared to eligible dividends.