In Examining Its Need to Cover Its Exposures to Foreign

question 16

Multiple Choice

In examining its need to cover its exposures to foreign exchange risk,a company obtains current data on the correlation between various currencies to which it is exposed.The company determines that its main currency exposures are to the USD and the JPY.These currencies have a correlation coefficient of +0.96.Based on the spot rate for each of the currencies,the company expects USD cash inflows equivalent to AUD 500 000,and JPY cash inflows equivalent to AUD 495 000.Which of the following statements is most correct?

• A) High positive correlation between USD and JPY (hedge risk exposure)
• B) High positive correlation between USD and JPY (little need to hedge risk) exposure
• C) High positive correlation between USD and AUD (hedge risk exposure)
• D) Low negative correlation between USD and AUD (no need to hedge risk exposure)

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Definitions:

Visual Sensitivity

The ability of the visual system to detect and respond to small differences or changes in the visual environment.

Opponent-Process Theory

The theory that opposing retinal processes (red-green, blue-yellow, white-black) enable color vision. For example, some cells are stimulated by green and inhibited by red; others are stimulated by red and inhibited by green.

Ewald Hering

A 19th-century physiologist known for his work on color vision and spatial perception.

Young-Helmholtz Theory

A theory of color vision proposing that the eye contains three types of color receptors, each sensitive to red, green, or blue wavelengths of light.