Question

1(a). (TRUE or FALSE?) Firms cannot manage risk through hedging: entering into a financial agreement that does not offset or guard against risk.

1(b). (TRUE or FALSE?) An exchange rate of two currencies found by using a common third currency is known as a currency cross rate.

1(c). (TRUE or FALSE?) If the U.S. dollar strengthens relative to the euro during the year, McDonald’s U.S. dollar profits will be higher after converting the euros to dollars and repatriating the profits back to the United States.

Answer 1

a) False.

Risk can be manage using hedge, for example taking put option on stock in which one is long is an example of hedging

b) True

An exchange rate of two currencies found by using a common third currency is known as a currency cross rate

c) False

If $ is getting stronger then at end of year one will get less dollar of one unit of euro, thus McDonald’s U.S. dollar profits will be lower after converting the euros to dollars and repatriating the profits back to the United States.