Why Would Investor Use Currency Futures or Forward Contracts to Hedge

question 42

Multiple Choice

Why would investor use currency futures or forward contracts to hedge against exchange-rate risk?

• A) to reduce the tax liabilities involved in windfall profits from an appreciating foreign currency
• B) to eliminate political risk associated with exchange-rate risk
• C) to reduce the uncertainty associated with the foreign company's ability to repay its debt
• D) to reduce uncertainty concerning the exchange rate at which the foreign security holdings can be converted into domestic currency

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Definitions:

Price-Earnings Ratio

A valuation ratio of a company's current share price compared to its per-share earnings, used to evaluate if a stock is over or undervalued.

Market Price

The present rate at which a service or asset is being traded.

Net Income

The final amount of money a company makes after removing all operational costs, taxes, and additional expenses from the overall income.

Return On Common Stockholders' Equity

A financial ratio that measures the profitability of a company from the perspective of common stockholders, calculated by dividing net income available to common shareholders by average common stockholder's equity.