A Company Enters into a Futures Contract with the Intent

question 4

Multiple Choice

A company enters into a futures contract with the intent of hedging an expected purchase of some equipment from a German company for DM350,000 on December 31.The contract requires that if the U.S.dollar value of DM700,000 is greater than $350,000 on December 31,the company will receive the difference.Alternatively,if the U.S.dollar value is less than $350,000,the company will pay the difference.Which of the following statements is correct regarding this contract?

• A) The Deutsche mark futures contract effectively hedges against the effect of exchange rate changes on the U.S.dollar value of the Deutsche mark commitment.
• B) The futures contract exceeds the amount of the commitment and thus hedges movements in the Deutsche mark exchange rate.
• C) The futures contract is a contract to sell Deutsche marks at a fixed price.
• D) The extra DM350,000 would be accounted for as a speculative investment.

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Definitions:

T

Often refers to the T-statistic in statistical tests, used to determine if there is a significant difference between two groups.

Confidence Interval

A range of values, derived from the sample data, that is believed to cover the true population parameter with a specified level of confidence.

Hypotheses

Plural form of hypothesis, which are proposed explanations made on the basis of limited evidence as a starting point for further investigation.

Simple Random Sample

A subset of individuals chosen from a larger set, where each individual has an equal probability of being selected.