One of the Drawbacks of Using Forward Contracts to Hedge

question 57

Multiple Choice

One of the drawbacks of using forward contracts to hedge foreign exchange risk from payables 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.

---

Definitions:

Absorption Costing

A method of costing that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead in the cost of a product.

Net Operating Income

The total operating profit of a company after all operating expenses, excluding taxes and interest expenses, have been deducted from total revenue.

First Year

Refers to the initial period or the first 12 months of a specific timeframe, often used in the context of financial or operational performance.

Absorption Costing

A method of product costing that includes all manufacturing costs, both fixed and variable, in the cost of a product.