B326-Activity(Ch-12)

Strategically, how might a business use derivatives to manage risk associated with foreign currency exchange rates?

• By ignoring currency fluctuations

• By using derivatives contracts to hedge against exchange rate changes

• By investing only in domestic markets

• By increasing exposure to foreign currencies

Strategically, why might a company choose to use swaps as a hedging instrument rather than futures contracts?

• Swaps allow customization of terms to match specific risk exposures, while futures contracts are standardized.

• Futures contracts are always more profitable than swaps.

• Swaps are only used for short-term hedging, while futures are for long-term.

• Swaps are less regulated than futures contracts.

Which of the following is true about the settlement in a forward contract?

• It may require actual physical delivery or allow a net settlement

• It always requires physical delivery

• It never allows net settlement

• It only applies to product quality

Which is the most common type of swap?

• Interest rate swap

• Currency swap

• Commodity swap

• Equity swap

Which of the following best describes a direct quotation in foreign exchange?

• US dollar per one foreign currency

• Foreign currency per US dollar

• US dollar per US dollar

• Foreign currency per foreign currency

What does a floating exchange rate reflect in the world market?

• Its buying power

• Its selling power

• Its production capacity

• Its inflation rate

What is a local transaction?

• A transaction within a country measured and recorded in the currency of that country

• A transaction between countries using different currencies

• A transaction whose terms are stated in a foreign currency

• A transaction involving forward contracts

What does "entity functional currency" refer to?

• The currency of its primary economic environment

• The currency used for international trade

• The currency used for forward contracts

• The currency of the country where the entity is registered

Which of the following best describes a foreign transaction?

• A transaction between countries or enterprises in different countries

• A transaction within a country

• A transaction using only the local currency

• A transaction involving only forward contracts

What is a foreign currency transaction?

• A transaction whose terms are stated in a currency other than the entity functional currency

• A transaction within a country using the local currency

• A transaction between enterprises in the same country

• A transaction involving only cash payments