A US Company Sells Merchandise to a Foreign Company Denominated in in the Foreign

question 16

Multiple Choice

A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?

• A) If the foreign currency appreciates, a foreign exchange gain will result.
• B) If the foreign currency depreciates, a foreign exchange gain will result.
• C) No foreign exchange gain or loss will result.
• D) If the foreign currency appreciates, a foreign exchange loss will result.
• E) Any gain or loss will be included in comprehensive income.

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Definitions:

Call Options

Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a specified quantity of an asset at a predetermined price within a set time frame.

Risk-Free Rate

The theoretical rate of return of an investment with zero risk, typically represented by the yield on government securities such as Treasury bills.

Striking Price

The predetermined price at which the holder of an option contract can buy (call) or sell (put) the underlying asset.

Callable Bonds

Callable bonds are bonds that can be redeemed by the issuer prior to their maturity date at a specified call price.