A Company Enters into a Futures Contract with the Intent

question 4

Multiple Choice

A company enters into a futures contract with the intent of hedging an expected purchase of some equipment from a German company for DM350,000 on December 31.The contract requires that if the U.S.dollar value of DM700,000 is greater than $350,000 on December 31,the company will receive the difference.Alternatively,if the U.S.dollar value is less than $350,000,the company will pay the difference.Which of the following statements is correct regarding this contract?

• A) The Deutsche mark futures contract effectively hedges against the effect of exchange rate changes on the U.S.dollar value of the Deutsche mark commitment.
• B) The futures contract exceeds the amount of the commitment and thus hedges movements in the Deutsche mark exchange rate.
• C) The futures contract is a contract to sell Deutsche marks at a fixed price.
• D) The extra DM350,000 would be accounted for as a speculative investment.

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Definitions:

Strategic Business Unit

A division or unit within a larger company that focuses on a specific market segment or product line, operating with its own strategy and objectives.

Merit Pay

A salary increase awarded to employees based on their job performance, acting as a motivational tool by rewarding high performers.

Unit Performance

The measurement of the efficiency, effectiveness, and productivity of a specific department or operational unit within an organization.

Ownership Mentality

A mindset where employees view themselves as co-owners of the business, taking responsibility for its success and acting in its best interest.