A Borrower Who Hedges by Selling BAB Futures Contracts

question 15

Multiple Choice

A borrower who hedges by selling BAB futures contracts:

• A)is trying to eliminate exchange rate risk
• B)will profit if the futures contracts increase in value
• C)will profit from a decrease in market yields
• D)is managing interest rate risk in the money market by locking-in a forward rate
• E)is trying to avoid the potential upside of a future physical transaction.

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Definitions:

Income Statement

A financial statement that reports a company's financial performance over a specific accounting period, detailing revenues and expenses.

Expenses

Outflows or depletions of assets or incurrences of liabilities during a period as a result of delivering or producing goods, rendering services, or carrying out other activities linked to an entity's main operations.

Variable Costing

A costing method where variable manufacturing costs are treated as product costs, and fixed manufacturing overhead is treated as a period cost.

Net Income

The amount of earnings left after all expenses, including taxes and costs, have been subtracted from total revenue.