Using an FX Swap to Hedge a Foreign Currency Loan

question 23

Multiple Choice

Using an FX swap to hedge a foreign currency loan:

• A)locks-in the foreign interest rate as the effective cost of funds
• B)ensures that the domestic hedged amount will repay the foreign debt
• C)will always result in a better outcome than not hedging a foreign loan
• D)is motivated by the desire for protection from a foreign currency depreciation.
• E)All of these are correct.

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Definitions:

Credit Sales

Sales transactions where the buyer is allowed to pay the seller at a later date, typically extending credit to the customer.

Direct Method

A way to present the cash flow statement where actual cash flows from operating activities are disclosed, contrasting with the indirect method.

Statement of Cash Flows

A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents.

Depreciation Expense

The allocated cost of a tangible asset over its useful life, reflecting wear and tear, obsolescence, or decline in value.