The Rationale for Hedging Currency Risk

Does hedging affect firm value in perfect capital markets?

• Yes
• No

What is the equation to calculate firm value?

• CFt / [(1+i)^t]
• [E(CFt)] / (1+i)
• [E(CFt)] / [(1+i)^t]
• [E(CFt)/(1+i)] ^t

Which one of these is NOT a direct cost of financial distress

• Lost credibility
• Legal fees due to liquidation
• Expenses to reorganize
• Bankruptcy costs

Indirect costs are the expenses such as legal fees that arise during bankruptcy

• True
• False

Buying an asset at a predetermined exercise price and on a predetermined expiration date is exercising a...

• put option
• call option
• future
• forward

Equity benefits from hedging if the firm value is more than the transfer of value to debt from the reduction of risk

• True
• False

Option values ____ as the volatility (risk) of the underlying asset ____

• increase, decrease
• increase, increase
• decrease, increase

Which of these is FALSE for a firm in financial distress

• employees demand cash compensation
• have lost credibility
• suppliers require COD (cash on delivery)
• service the foreign market first

Equity wants to increase the value of its call option, except at the expense of debt

• True
• False

What does equity not want to do when the firm is in financial distress?

• Take large risks
• invest in positive NPV projects
• underinvest in new projects
• increase volatility of firm's assets