To eliminate all risk (including credit risk) an American company with a contractto sell goods to a foreign country can hedge by purchase a forward ratecontract.O No answer text provided.O TrueO No answer text provided.O False Which of the following is NOT one of the three methods of estimating the costof common equity (stock) discussed in the Cost of Capital chapter and lecture?O Weighted Average Cost of Capital (WACC)O Multistage-Growth Dividend ModelO Capital Asset Pricing Model (CAPM)O Constant-Growth Dividend Model

The question is related elimination of risk (including credit risk) by forward contract. Credit…

Answered: To eliminate all risk (including credit…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Fannie Mae and Freddie Mac play an important role in the mortgage market. True False The effective yield on foreign money market securities is not affected by exchange rate movements. True False
There are as many different approaches to foreign exchange transaction exposure management as there are firms and no real consensus exists regarding the best approach. List and discuss three different exposures you can hedge and three different types of hedges
Since the U.S. company is a buyer, should not it focus on either a Forward contract or a "Call Option"? This case is about "Foreign Currency Liability," which is "Payable." Put Option is used when the company exercises selling options, but the case about includes that the company "regularly purchases." Can you please explain thoroughly? unless i have messed anything to grasp.
Forward foreign currency contracts are off the balance sheet transactions True False
Which of the following statements is CORRECT? A. Foreign exchange dealers earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase. B. Training Speculators earn a profit by a bid - ask spread on currencies they purchase and sell. C. Currency trading lacks profitability for large commercial and investment banks but is maintained as a service for corporate and institutional customers. D. Arbitragers seek to profit from simultaneous exchange rate differences in different markets.
From the U.S. standpoint, a capital outflow will occur when a Japanese investor buys a portion of the U.S. government debt. True False
Imagine that parties W, X, Y, and Z enter into CDS contract on the reference entity A. The figure below summarizes bilateral CDS agreements (e.g., W buys protection from X, and makes periodic payments to X). Let's assume the reference entity A is in default. In addition, Y is also in default. In such a case, which of the following entities would not be affected by the counterparty risk? W X O Y ○ None Protection Buyer on A W X Protection Seller on A N Protection Seller on A Protection Buyer on A Protection Buyer on A Y Protection Seller on A
Transaction exposure gives rise to foreign exchange gains and losses that are ultimately realized in cash True False Hedging does not protect companies from exchange rate fluctuations True False Assets and liabilities translated at the historical exchange rate are not exposed to a translation adjustment True False Spot rate is the today's (current) price for purchasing or selling a foreign currency True False Foreign currency option a right to buy or sell foreign currency True False
Question 4 Which of the following statements relating to foreign currency hedging is false? Instead of hedging with foreign currency derivatives, some companies use natural hedging by diversifying across currency zones , through operational matching of revenues and expenses, or through the use of non-derivative financial instruments. Generally, hedge accounting for foreign currency risk requires that the hedged transaction be denominated in a currency other than the hedging entity's functional currency. In the context of hedge accounting considerations, a key distinction between a forecasted transaction and a firm commitment is the certainty and enforceability of the terms of the transaction. Forward contracts are normally standardized and exchange-traded instruments, and therefore valued based on quoted market prices.
A major risk faced by a swap dealer is exchange rate risk. This is a)the probability exchange rates will move against the dealer. b)the probability that a foreign counterparty will default in a currency swap. c)none of the options d)the probability that either counterparty defaults in a currency swap.
Sooner Co. is a U.S. wholesale company that imports expensive high-quality luggage and sells it to retail stores around the United States. Its main competitors also import high-quality luggage and sell it to retail stores. None of these competitors hedge their exposure to exchange rate movements. Why might Sooner’s market share be more volatile over time if it hedges its exposure?
Which of the following statements regarding a cross-currency swap is NOT correct? a. The re-exchange at the conclusion of a cross-currency swap usually takes place at the initial exchange rate. b. There is an exchange of principal amounts between counterparties at the beginning and end of the swap. c. As the cross-currency swap is arranged through a bank, there is no credit risk. d. Once the cross-currency swap rate is determined, cash flows are known with certainty.

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To eliminate all risk (including credit risk) an American company with a contract to sell goods to a foreign country can hedge by purchase a forward rate contract. O No answer text provided. O True O No answer text provided. O False