Question

QUESTION 5 When a firm is exposed to translation exposure, a perfect hedge (full coverage) can usually be achieved when:

using a money market hedge

using an option hedge

using a futures hedge

a perfect hedge is nearly impossible, and therefore, none of these are correct

Answer 1

Translation exposure occurs when parent company transfers the financial statement currency of subsidiary in its own currency so as to prepare consolidated financial statement. Perfect hedge is when parent company is fully able to hedge the foreign exchange risk which is not possible. Using money market hedge, option hedge or future hedge would not entirely provide full coverage from exchange rate risk and thus translation exposure would still exists.

Thus. correct answer is statement (d) perfect hedge is nearly impossible and thus none of the above correct.