Why would a company prefer a foreign currency option over a forward contract in hedging a foreign currency firm commitment? Why would a company prefer a forward contract over an option in hedging a foreign currency asset or liability?

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.

Transaction 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 False

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.

What is meant by spot rate in case of foreign currency transaction?

How can the company use currency futures contracts to hedge against exchange rate risk?

Assume a company needs to hedge payables. Which of the following conditions has to be met so a company would choose the options hedge? The break-even spot exchange rate is greater than the forward exchange rate. The break-even spot exchange rate is less than the forward exchange rate. The break-even spot exchange rate is less than the spot exchange rate. The break-even spot exchange rate is greater than the spot exchange rate.

To hedge payables, the firm will purchase a currency call option on the payable foreign currency. The firm can use the call option to buy foreign currency at a specified price. Why should the company, in this case, purchase a call option than a Forward contract? Maybe to make it easy on me, you can illustrate the answer by highlighting the situations suitable for options and Forward contracts. For example, "when this situation occurs....., then that hedging we should use .... because of XYZ reasons/effects on profitability".

Question 12 True or False?  The foreign currency hedge accounting guidance allows for the use of nonderivative instruments as the hedging instrument for hedges of net investments and foreign currency cash flows hedges, but not for foreign currency fair value hedges of firm commitments  True  False

Why might a company prefer a foreign currency option rather than a forward contract in hedging a foreign currency firm commitment? Why might a company prefer a forward contract over an option in hedging a foreign currency asset or liability?