Test Bank Ch8 3616 Butler
PART IV Managing the Risks of Multinational Operations
Chapter 9 The Rationale for Hedging Currency Risk
True/False
1. In a perfect financial market, financial contracts are zero-NPV investments. ANS: True.
2. If hedging currency risk is to add value to the stakeholders of the firm, then hedging must impact either expected future cash flows or the cost of capital or both. ANS: True.
3. If financial markets are informationally efficient, then corporate financial policy is irrelevant. ANS: False. Don’t confuse informational efficiency with a perfect market. Although the perfect market conditions ensure informational efficiency, informationally efficient markets can be imperfect.
4. Perfect financial markets are a necessary condition for corporate risk hedging to have value. ANS: False. Market imperfections are necessary conditions.
5. In perfect financial markets, corporate financial policy is irrelevant. ANS: True.
6. In a perfect financial market, the law of one price holds. ANS: True.
7. Equal access to perfect financial markets ensures that individual investors can replicate any financial action that the firm can take. ANS: True.
8. In perfect financial markets, corporate hedging policy has no value. ANS: True.
9. In perfect financial markets, corporate investment policy is irrelevant. ANS: False. Firm value depends entirely on the firm’s investments in a perfect financial market.
10. If corporate financial policy is to have value, then at least one of the perfect market assumptions cannot hold. ANS: True.
11. Real-world financial markets are perfect markets. ANS: False. Perfect markets are a theoretical ideal and not a practical reality.
12. Market imperfections are greater across national boundaries than within national boundaries. ANS: True.
13. In perfect financial markets, multinational corporations have an advantage over domestic firms in
Chapter 9 The Rationale for Hedging Currency Risk
True/False
1. In a perfect financial market, financial contracts are zero-NPV investments. ANS: True.
2. If hedging currency risk is to add value to the stakeholders of the firm, then hedging must impact either expected future cash flows or the cost of capital or both. ANS: True.
3. If financial markets are informationally efficient, then corporate financial policy is irrelevant. ANS: False. Don’t confuse informational efficiency with a perfect market. Although the perfect market conditions ensure informational efficiency, informationally efficient markets can be imperfect.
4. Perfect financial markets are a necessary condition for corporate risk hedging to have value. ANS: False. Market imperfections are necessary conditions.
5. In perfect financial markets, corporate financial policy is irrelevant. ANS: True.
6. In a perfect financial market, the law of one price holds. ANS: True.
7. Equal access to perfect financial markets ensures that individual investors can replicate any financial action that the firm can take. ANS: True.
8. In perfect financial markets, corporate hedging policy has no value. ANS: True.
9. In perfect financial markets, corporate investment policy is irrelevant. ANS: False. Firm value depends entirely on the firm’s investments in a perfect financial market.
10. If corporate financial policy is to have value, then at least one of the perfect market assumptions cannot hold. ANS: True.
11. Real-world financial markets are perfect markets. ANS: False. Perfect markets are a theoretical ideal and not a practical reality.
12. Market imperfections are greater across national boundaries than within national boundaries. ANS: True.
13. In perfect financial markets, multinational corporations have an advantage over domestic firms in