Question

2. A key concern of investors is how to manage the trade-off between debt and equity.

1. True
2. False

3. Suppose interest rate parity holds between the U.S. and England. If the Bank of England reduces the domestic interest rate, all other things being equal the British investors will shift funds from American investments to domestic investments.
   1. True
   2. False

4. Which of the following statements is true about hedging?

1. It protects the hedger from a downside loss
2. It assures a gain to the hedger
3. It is beneficial for a buyer when the currency appreciates
4. It eliminates exchange rate risk completely

Answer 1

1. The given statement is FALSE because it is not related to investor. the trade off theory is related to the capital structure of company.

the trade off theory is concerned with finding the optimum mix of equity capital and debt capital into the overall capital structure of the company.

2. The given statement is FALSE because there would be a reduction in the domestic interest rate, the British investor will be not shifting funds from American interest to domestic investment.

3. Hedging will be protecting against the downside loss and it is not a certainity in eliminating exchangeexchange rate risk so the correct statement to be option (A).

Rest of the Other statements are not reflecting the true scenarios.