BEC 6.4

Question 1

Distinguish between diversifiable and non-diversifiable risk

Answer 1

(D)iversifiable Risk

Question 2

Define a futures hedge

Answer 2

Entitles its holder to entierh purchase or sell a particular number of currency units of an identified currency for a negotiated price on a stated date

Question 3

Define money market hedge

Answer 3

Uses international money markets to plan to meet future currency requirements by either investing internationally in a manner that times investment maturities with settlement of foreign payables or borrows against foreign receivables in a manner that times the maturity of borrowings with the collection of receivables

Question 4

Name the currency option hedge used to mtigate transaction exposure to exchange rate risk for payables.

Answer 4

Call option: Option to buy a foreign currency (for currency hedges) at a pre-negotiated price

Question 5

Name an objective of transfer pricing between foreign and domestic subsidiaries and their parent companies

Answer 5

Minimization of taxation