A US Firm Holds an Asset in Great Britain and Faces

question 52

Multiple Choice

A U.S. firm holds an asset in Great Britain and faces the following scenario: Where P^* = Pound sterling price of the asset held by the U.S. firm
The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated cash flow at F₁($/£) = $2/£. As a result

• A)The firm's exposure to the exchange rate is made worse.
• B)He has a nearly perfect hedge.
• C)He has a perfect hedge.
• D)None of the above

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Definitions:

Pre-acquisition Entry

A journal entry made to record the financial impacts of acquiring company interest or assets before full acquisition or control is obtained.

Declared Dividend

A payment authorized by a company’s board of directors to be distributed among shareholders out of the company’s earnings.

Business Combination Entries

The journal entries recorded to account for the consolidation of entitles under common control, reflecting their assets, liabilities, and any non-controlling interest.

Fair Value

Fair value is an estimate of the price at which an asset or liability could be exchanged between knowledgeable, willing parties in an arm's length transaction.