A Company Due to Pay a Certain Amount of a Foreign

question 16

Multiple Choice

A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts.Which of the following best describes the advantage of hedging?

• A) It leads to a better exchange rate being paid
• B) It leads to a more predictable exchange rate being paid
• C) It caps the exchange rate that will be paid
• D) It provides a floor for the exchange rate that will be paid

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Definitions:

Measurement Principles

Guidelines that dictate how the economic activities of a company are captured in its financial statements.

Historical Cost

The original monetary value of an asset, reflecting the purchase or production cost without adjustments for inflation or market value changes.

Current Value

The present worth of an asset or liability, taking into account factors such as market conditions and depreciation.

Financial Statements

Records outlining a corporation's financial health, incorporating details from the balance sheet, income statement, and cash flow statement.