If a USCompany Wants to Hedge a Prospective Loss on Its Investment

question 16

Multiple Choice

If a U.S.company wants to hedge a prospective loss on its investment in a foreign entity that may result from a foreign currency fluctuation,the U.S.company should

• A)purchase a forward to swap currency of the foreign entity's local country for U.S.currency.
• B)purchase a call option to buy currency of the foreign entity's local country.
• C)issue a loan in the foreign entity's local country.
• D)borrow money in the foreign entity's local country.

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Definitions:

Consolidation Worksheet

A financial document used for combining the financial statements of a parent company with its subsidiaries to present as one entity.

Equity Method

An accounting method used to assess the profits earned by investments in other companies by recording income equivalent to the investor's share of the investee's profits.

Cumulative Translation Adjustment

An entry in the comprehensive income section of a company's balance sheet that represents the aggregate effect of exchange rate changes on the translation of foreign subsidiaries' financial statements.

Current Rate Method

A method of foreign currency translation where all financial statement items are translated at the current exchange rate.