A Firm Must Make a Large Future Payment in a Foreign

question 9

Multiple Choice

A firm must make a large future payment in a foreign currency and wants to hedge the associated exchange rate risk.Which one of the following identifies the cost of such a hedge?

• A) difference between expected and current spot rates
• B) difference between expected and current forward rates
• C) difference between the forward premium and the forward discount
• D) difference between the forward rate and the expected future spot rate

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Definitions:

Operating-Depreciation Expense

This refers to the portion of depreciation expense that is directly related to the operations of a business.

Generate Future Income

The process or strategy of creating or increasing earnings or revenue streams for a person or entity in subsequent periods.

Net Income

Net Income is the total profit of a company after all expenses, taxes, and costs have been subtracted from total revenue.

Cash Provided

Funds that are generated and made available by a business through its operational activities, investments, or financing.