Why is hedging considered a cost center and not a profit center?
What will be an ideal response?
Answer: Hedging can be viewed as an insurance process. The purpose of insurance is to indemnify the insured in the case of losses. The premium paid for an insurance policy is the cost to insure the firm's assets against future loss and loss of value of the firm. In the same vein, hedging is about avoiding losses before they occur and adversely affect the cash flows and value of the firm. When hedging, derivative securities such as currency forward, futures, and options contracts are employed. The value of the derivative securities goes down when the underlying assets of the firm go up in value, while the values of the derivatives rise when the underlying assets fall in value.
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A retailer that owns several of its locations and desires capital to expand should consider using a _____
a. percentage lease b. sale-leaseback c. short-term lease with renewal options d. graduated lease
The subjective intent approach differs from the objective intent approach in that the subjective intent approach _______
A. tries to interpret the conduct of the parties involved B. tries to interpret the intent of the parties involved C. is considered an inferior form of interpretation D. is only used when objective intent cannot be interpreted