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?

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?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

Do the pros of Investor-State Dispute Settlements outweigh its cons?
A firm decides to sell a pool of receivables to a factor with recourse (i.e. the firm selling the receivables must make payment to the buyer of the receivables in the event that the party that originally owes the money does not pay). Under Current U.S. GAAP, which of the following statements is (are) true: A. The firm selling the receivables is prohibited from reporting any Gain or Loss on the sale. B. Any cash received from such a transaction must be reported in the Financing Section of the Statement of Cash Flows. C. Both Statements A & B are true. D. None of the above statements are true.
What are the sources of foreign financing?
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.
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.
When a country adopts a fixed exchange rate regime, what is that the country has to give up (trade off)?
Investors and MNCs exporting or importing goods and services or making foreign investments throughout the global economy are faced with an exchange rate risk,which can have severe financial consequences on firms profitability,cash flows,and their market value,if not managed appropriately. MNC's use a number of external techniques of risk(exposure)management and resort to contractual relationships outside thier companies in order to reduce (or redistribute)the risk of foreign exchange losses.What are the determinants of hedging currency risk or foreign exchange exposures which pose risks to MNC's cashflows,competitiveness,marker value and financial reporting.