EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 25, Problem 3CP
Summary Introduction
To determine:
The hedge in the investor's home currency and in the foreign currency in the foreign market if an investor wants to hedge in the common stock of companies in a foreign country
Introduction:
Hedging is done to lower the risk of price changes.
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Which statement is correct regarding fair value hedges and cash flow hedges of a foreign currency asset or liability.
a.
revaluation of a cash flow hedge is reported in the income statement
b.
under a cash flow hedge the difference between the revaluation gain and loss on the hedge and the revaluation gain or loss on the item being hedged is reported in Other Comprehensive Income
c.
under a cash flow hedge the difference between the revaluation gain or loss on the hedge and the revaluation gain or loss on the item being hedged is reported in the income statement
d.
a. revaluation of a fair value hedge is reported in Other Comprehensive Income
e.
under a fair value hedge the difference between the revaluation gain or loss on the hedge and the revaluation gain or loss on the item being hedged is reported in Other Comprehensive Income
An investor in the common stock of companies in a foreign country may wish to hedge against the _____ of the investor’s home currency and can do so by _____ the foreign currency in the forward market.a. depreciation; selling.b. appreciation; purchasing.c. appreciation; selling.d. depreciation; purchasing.
“Investors engage in forward exchange transactions to hedge against foreign currency risk.
EXPLAIN WHETHER TRUE OR FALSE
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- What factors create a foreign exchange gain on a foreign currency transaction? What factors create a foreign exchange loss?arrow_forwardAnswer true or false to the following statement and explain: “Investors engage in forward exchange transactions to hedge against foreign currency risk.”arrow_forwardWrite Notes on the Following A: Off Balance Sheet Assets and Liabilities B: Interest Rate Risk Management C: Sterilized Intervention in Foreign Exchange D: Unsterilized Intervention in Foreign Exchange E: Balance of Paymentarrow_forward
- Under what conditions can companies use hedge accounting to account for a foreign currency option used to hedge a forecasted foreign currency transaction?arrow_forwardThe exchange loss/gain due to a transaction exposure is estimated while O a. Converting a foreign currency into a domestic currency O b. Quoting a price for a foreign currency transaction O c. Entering into a transaction in foreign exchange O d. Verifying the fluctuation in the exchange ratearrow_forwardTransaction exposure is the risk that a company's equities, assets, liabilities, or income will change in value as a result of exchange rate changes. Select one: True Falsearrow_forward
- Which foreign exchange risk relates to the value of assets held in foreign currency on the statement of financial position of financial institutions which trades? a. Economic risk b. Transaction type risk c. Currency risk d. Translation riskarrow_forwardWhich of the following refers to the money market hedge of a company’s payables (receivables)? 1. A company sells (buys) its foreign currency receivables (payables) forward to eliminate its exchange risk exposure. 2. A company borrows (or lends) in foreign currency to hedge its foreign currency receivables (payables), thereby matching its assets and liabilities in the same currency. 3. A company buys a currency at the place where it is priced cheaper and immediately sells it at the place where it is priced higher. 4. A company buys a foreign currency call (put) option to hedge its foreign currency payables (receivables).arrow_forwardWhat adjustments might be made due to exchange rate riskand political risk to the domestic cost of capital for a foreigninvestment?arrow_forward
- Foreign exchange risk or exchange rate risk is a financial risk that occurs when a financialdeal is denominated in a currency other than that of the base currency of the company.Explain the following types of risks that international firms are exposed to:a. Transaction riskb. Translation riskc. Economic riskarrow_forwardAn example of transaction exposure is when Question 4 options: companies have obligations for the purchase of goods at previously agreed prices. companies borrow funds in domestic currency. there is an impact of currency exchange rate changes on the reported financial statements of a company. there is a long-term effect of changes in exchange rates. changing exchange rates persists on future prices, sales, and costsarrow_forwardWhat is arbitrage? Indicate the forms of arbitrage that we can apply to the foreign exchange market.arrow_forward
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How to Invest in Foreign Stocks (INVESTING FOR BEGINNERS); Author: The Money Tea;https://www.youtube.com/watch?v=Qzj4VozcO9s;License: Standard Youtube License