[yomomma]

I’m having trouble with one of Wiley’s Economics question(Mod 40 #94)

I thought the answer was B but was wrong. If anyone could, please help me understand this question!!

#94. Which of the following is not a means by which a firm might hedge the political risk

of an investment in another country?

A. Insurance

B. Buy future contracts for future delivery of the country’s currency.

C. Finance the operations with local-country capital.

D. Enter into joint ventures with local-country firms.

(Answer : D)

The explanation says (D) is correct because entering into joint ventures with local firms reduce the risk of seizure of the investment by the government.

Doesn’t this explanation mean that it is hedging political risks? And the question is looking for an answer that doesn’t affect political risk? I’m confused 🙁

Rest of the Explanations :

(A) is incorrect because a firm can purchase insurance to mitigate political risk.

(B) is incorrect because futures contract are designed to hedge transaction risks relating to foreign exchange rates.

(C) is incorrect because if the firm finances investment with local capital, it may not be forced to repay the loans if assets are seized by the government.

FAR - 79
AUD - 82
REG - 83
BEC - 77 Booya

[thehip41]

In C, it may NOT be required to pay back the loans (hedge) if the government steals the assets

In D, they have to pay back the loans if the government steals the assets.

Only in D are they left on the hook for paying.

So that's the only one that isn't a good hedging option.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[thehip41]

In C, it may NOT be required to pay back the loans (hedge) if the government steals the assets

In D, they have to pay back the loans if the government steals the assets.

Only in D are they left on the hook for paying.

So that's the only one that isn't a good hedging option.

FAR - 83
AUD - 73 92
BEC - 83
REG - 88

Licensed CPA in the state of Michigan

[Author]

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