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.

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Definitions:

Installment Payments

Payments made over a period of time to settle a debt, typically including both principal and interest components.

Journal Entries

Records that document all the financial transactions of a business and show the accounts affected by each transaction.

Carrying Value

The book value of an asset or liability on a company's balance sheet, calculated as its original cost minus accumulated depreciation or amortization.

Bonds

A fixed income instrument that represents a loan made by an investor to a borrower, typically corporate or governmental.