A US FI Wishes to Hedge a €10 000 000

question 21

Multiple Choice

A US FI wishes to hedge a €10 000 000 loan using euro currency futures.Each euro futures contract is for €125 000, and the hedge ratio is 1.40.The loan is payable in one year in euros.What type of currency hedge is necessary to protect the FI from exchange rate risk?

• A)Buy euro currency futures.
• B)Sell euro currency futures.
• C)Finance the loan with Eurodollar deposits.
• D)Either sell euro currency futures or finance the loan with Eurodollar deposits.

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Definitions:

Fiscal Period

A specific time period for which an organization prepares financial statements, typically a year, but can also be a quarter or month.

Deferred Expense

A deferred expense is an expenditure that is made in advance and recorded as an asset until it is consumed or its value expires, at which point it is charged to expense.

Accrual Basis

An accounting method where transactions are recorded when they are earned or incurred, regardless of when cash is exchanged.

Matching Concept

An accounting principle that requires the expenses to be matched with the revenues they helped to generate in the same accounting period.