Multiple Choice: Hedging Select the correct answer for each of the following:

A company might use a hedge:

a. When it has equal foreign currency asset and liability positions.

b. To avoid paying a liability denominated in a foreign currency.

c. When it has a large receivable denominated in U.S.

dollars.

d. When it has a large receivable denominated in a foreign currency.

When a company does not hedge an exposed asset position denominated in a foreign currency, it will:

a. Realize an exchange loss if the assets decline in value.

b. Realize an exchange gain if the foreign currency becomes weaker (more units in exchange for a dollar).

c. Realize an exchange loss if the foreign currency becomes weaker (more units in exchange for a dollar).

d. Both a and b are correct.

Your company buys much of its raw materials in the country of Bactar, and you have been following the country’s economy. You believe that Bactar’s currency, the bak, may lose some of its value relative to the dollar, and you want to use this information to help your company. If the bak declines in value (more baks are required per $1), you can expect the cost of your raw materials to:

a. Increase because the dollar is now stronger. “

b. Decrease because the dollar is now stronger.

c. Remain the same if you have been making the purchases in baks.

d. Not be affected unless there is an exposed liability position.

Which of the following are risks that you might expect a company to hedge against?

a. An exposed asset position in a foreign subsidiary.

b. An exposed liability position in a foreign subsidiary.

c. Purchase commitments denominated in a foreign currency.

d. All of the above.