What Is the Primary Difference Between a Cash Flow Hedge

question 18

Multiple Choice

What is the primary difference between a cash flow hedge and a fair value hedge?

• A) The fair value hedge must completely offset the variability in the cash flow from the foreign currency receivable or payable.
• B) The cash flow hedge can only be used to offset potential foreign currency losses on accounts receivable.
• C) The cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable.
• D) The fair value hedge can only be used to offset the variability in cash flow from long-term fixed assets related to foreign currency fluctuations.

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Definitions:

Public Sector

Pertains to the part of the economy composed of both public services and public enterprises, owned and operated by the government.

Rational Expectations

The hypothesis in economics that individuals form forecasts about the future based on all available information and past experiences in an unbiased and logical manner.

Monetary Policy

The process by which the monetary authority of a country, like the central bank, controls the supply of money, often targeting an inflation rate or interest rate to ensure stability and economic growth.

Fiscal Policy

Government policy regarding taxation and spending that is used to influence the economy, including actions to manage the budget deficit or surplus to achieve economic objectives.