Which One of the Following Is Advised When Evaluating a Capital

question 43

Multiple Choice

Which one of the following is advised when evaluating a capital project in a foreign country if you are concerned about political risk?

• A) The project should be abandoned until this risk is eliminated.
• B) The project's cost of capital rate should be decreased to offset the perceived risk.
• C) The domestic discount rate should be increased to account for the added risk.
• D)The project cash flows should be decreased to account for the political risk.

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Definitions:

Hedge

An investment strategy used to reduce risk by taking positions that offset potential losses in other investments.

Strike Price

The strike price is the price at which the holder of an option contract has the right to buy (for a call option) or sell (for a put option) the underlying asset or security upon exercise of the option.

Futures Option

An option contract that gives the holder the right, but not the obligation, to buy or sell a futures contract at a specified price on or before a certain date.

Forward Contract

A contractual arrangement to purchase or sell a given commodity or asset at a set price on a designated date in the future.