One of the Drawbacks of Using Forward Contracts to Hedge

question 26

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:

Present Value

Present Value is a financial concept that represents the current worth of an amount that is to be received in the future, discounted to reflect the time value of money and interest rates.

Accurate To The Cent

Describes a level of precision in financial calculations or measurements that are exact to the smallest denomination of currency, such as a cent in the U.S. dollar.

Periodic Interest Rate

The rate of interest charged on a loan or earned by an investment for a duration that is less than one year.

Annuity

An economic scheme that delivers a constant payment stream to a recipient, predominantly utilized in preparing for retirement.