Explanation:
Due to inevitable exchange rate fluctuations, foreign currency risk is always a concern for companies with monetary assets denominated in foreign currencies and with sales to customers paying with foreign currencies. There are several ways to hedge against this risk, but for each potential method, the costs of implementation should be balanced against the expected benefit of the hedge. If the costs associated with the hedge exceed the benefit, the best strategy would be to leave the exposure unhedged. Assuming they are not cost prohibitive, using a forward contract to lock in an exchange rate, buying put options to hedge against the depreciation of foreign currencies, and incorporating foreign currency debt to offset asset declines are all viable hedging strategies.
(Book 1, Module 2.2, LO 2.d)
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Question 79
The treasurer for the Oakton Company is concerned about foreign currency risk due to its foreign investment positions and having a significant amount of sales to customers in foreign countries. To hedge against this risk, the treasurer would likely take all of the following actions except:
A
entering into a forward contract to lock in an exchange rate.
B
initiating a derivatives position, assuming the costs exceed the value of the hedge.
C
purchasing currency put options to hedge against foreign currencies depreciating in the future.
D
incorporating foreign currency debt to help offset the value of a decline in foreign investments.
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