Assuming No Transaction Costs (I

question 26

Multiple Choice

Assuming no transaction costs (i.e., hedging is "free") , hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________.

• A) increase; not change
• B) decrease; not change
• C) not change; increase
• D) not change; not change

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Definitions:

IRR

The Internal Rate of Return is a financial measurement employed to gauge the potential profit of investments.

Flexibility Option

An investment option that provides the holder with the ability to respond to changes in the financial market or business environment.

Surrogate Beta

Surrogate beta is a method used in finance to estimate the beta of a project or investment by using the beta of a similar, publicly traded company or project as a proxy.

Pure Play Method

A valuation technique that involves comparing the firm of interest to another company that has a single line of business similar to the target company.