1. Currencies – U.S. dollar foreign-exchange rates. May 5, 2011 Country/currency
ID: 2735576 • Letter: 1
Question
1. Currencies – U.S. dollar foreign-exchange rates. May 5, 2011
Country/currency………..in US$..............per US$
British Pound……………….1.5347…………….0.6516
Norwegian Kroner……….0.1690……………..5.9173
Thai Baht……………………..0.0310……………..32.250
Mr. Charles imports light bulbs from Norway to the United States. He has a contract to purchase from a Norwegian firm 10,000 light bulbs that he plans to sell in Chicago in 30 days. Assuming that futures trading exists between U.S. dollars and Norwegian Kroner, how can Mr. Charles use such a market to hedge foreign currency risk?
Contract to sell US Dollars at an agreed upon price in 30 days
Futures contracts cannot be used to hedge in this circumstance
Contract to buy Kroner at an agreed upon price in 30 days
Contract to buy US Dollars at an agreed upon price in 30 days
Contract to sell Kroner at an agreed upon price in 30 days
2. The chapter on financial leverage, as well as the discussion in class, used “risk units” to illustrate what about financial leverage?
That the risk of the firm’s assets cannot be changed by shifts in financial leverage
That debt is risk free
That for firms with leverage, the higher the EBIT, the higher is firm risk
That firm value is maximized where the cost of capital is minimized
That debt financing creates a tax shield and therefore lowers firm risk
a.Contract to sell US Dollars at an agreed upon price in 30 days
b.Futures contracts cannot be used to hedge in this circumstance
c.Contract to buy Kroner at an agreed upon price in 30 days
d.Contract to buy US Dollars at an agreed upon price in 30 days
e.Contract to sell Kroner at an agreed upon price in 30 days
Explanation / Answer
1. C Contract to buy Kroner at an agreed upon price in 30 days
Since he impoted he need to pay Kroner
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